God and the Art of Toy and Diecast Marketing
Charlie Munger
By Lu Su
I don’t know if you caught the news a couple of months ago. Charlie Munger, one of the best investors in the world, died at the age of 99. Charles Thomas Munger (January 1, 1924 – November 28, 2023) was an American businessman, investor, and philanthropist. He was vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett described Munger as his closest partner and right-hand man.*
Before teaming up with Warren, Charlie ran an investment partnership of his own from 1962 to 1975. According to Buffett's essay "The Superinvestors of Graham-and-Doddsville", published in 1984, Munger's investment partnership generated compound annual returns of 19.8% during the 1962–75 period compared to a 5.0% annual appreciation rate for the Dow.*
Berkshire Hathaway saw a 19.8% compounded annual gain from 1965 to 2022, compared to 9.9% for the S&P 500 Index. In terms of overall gain, Berkshire saw a 3,787,464% meteoric rise during that time period while the S&P rose 24,708%^ Or another way to look at it, is if we had the foresight in 1965 to invest $100 into Berkshire Hathaway that he and Warren built together, that hundred dollar investment made back then would now be worth roughly $2.42 million today^^.
It’s a safe conclusion that team Munger & Buffet are WAY better than average at seeing into the future with the companies they invest in.
I started watching YouTube videos on this Charlie and realized that he pretty much kept himself out of the Berkshire Hathaway limelight for decades, which seem to go mostly to Warren Buffet. For someone of his wealth and fortune, he did very few solo interviews.
However, on February 16, 2022 Charlie did an exclusive solo interview on Yahoo! Finance and predicted the value of the U.S. dollar would crash to zero within one hundred years.
“What?!?” I said to myself, “Did I hear that correctly?” as I rewound the video.
One of the top investors in the world said that the US currency would be worthless within one hundred years? The exact quote when like this:
“I think the safe assumption for an investor is that over the next hundred years, the currency [U.S. dollar] is going to zero,” he told Yahoo Finance. “That is my working hypothesis.”
The above prophetic sentence stunned the Yahoo Finance Editor-in-Chief Andy Serwer, as it did me. If you want to see and hear this interview, you can catch it here:
https://finance.yahoo.com/news/inflation-can-be-the-way-democracies-die-charlie-munger-183158672.html
“Wow! That will be a different type of environment, won’t it?” asked Andy in an attempt to inject some humor in the form of under-exaggeration.
“Yes, a very dangerous environment,” replied Charlie in a serious tone.
The US dollar is the value store for us as well as for many other world economies. Travel to any country that has spiraling inflation. Their fiat currency is losing value every day. For the ones that can, many don’t go to their bank to deposit money; But, rather go to people that have access to other types of currency and exchange their country’s depreciating fiat currency for a more stable one (e.g. US$, Euros). Domestic and world trade is currently conducted in US dollars too. When all our bank accounts, brokerage accounts, and retirement are worthless (i.e. go to zero), there will be mayhem everywhere.
If the US financial system fails (the largest in the world), we are likely talking about a worldwide financial collapse of the monetary system. The banks throughout the world will collapse like dominos. I heard a good analogy. The US economy is like the Titanic and all the other world economies are smaller ships tethered to both us and each other. History has shown that there is a 100% chance that fiat money fails. It is just a matter of time. Some currencies last for a decade, some a couple of decades and still others such as the US dollar or the British pound have lasted multiple decades before losing most of their value.*~
Fiat money is a type of currency that is not backed by a commodity, such as gold or silver. Fiat means a decree or an authoritative order. Since 1971 the US dollar went off the gold standard and became fiat currency that is backed by the faith and credit of the US government. It’s just when a people holding that fiat money lose all faith in their government, it plummets in value in a hurry. What generally follows is violence, riots, looting, and usually regime change with an autocratic type of government. When people cannot feed themselves, cannot afford to live where they are currently living (wait, I think the majority of people in the world are already in that condition already), it’s going to be a “different type of environment.”
What will greatly aggravate the situation (during that time) is the inability to pay people to keep the peace and people to maintain the power grid, because most of these people cannot work for free and have their own family members to feed and protect. I remember in 2003 when Iraq’s government was in turmoil, looters stole a ton of stuff -including the copper wires on telephone poles. But the real and pertinent question I want to know is when we get to that stage when people are breaking into your house to take food, weapons, and toilet paper (the pandemic showed it too was a precious commodity to be horded), how are you going to be able to continue buying diecast model cars from me?
For those of you who think crypto currency is the answer, I want to remind you the value of people’s crypto accounts seems to always be measured in US$, which is going to be worth zero in less than 100 years (per Charlie Munger). Let’s see what happens to the value of crypto when the electrical grid fails and storage of 1’s and 0’s on memory chips and hard drives no longer work.
A friend of mine whose company offers web site development and web hosting was actually considering in investing in a data center in Secaucus, NJ. It’s a super secure building. If an unauthorized person is detected, doors lock everywhere, trapping the intruder inside until the authority comes. He also told me in the basement are storage tanks that hold over 20,000 gallons of diesel fuel to power backup generators. My question is after the operators move their family inside the data center, because it’s safer than their house and because it has electricity, they will soon realize that no fuel replenishment is coming; they then have to decide between keeping servers up for their clients who can no longer pay them or use the fuel that has greatly risen in value to trade for something that can help sustain their family.
You know when you go to Costco or Trader Joes and they give you a little sample for you to taste of something? I feel the citizens of New Jersey already got a tiny taste of what is to come. When super storm Hurricane Sandy hit us in 2012, the electrical grid went down for weeks for many homes and businesses. Fuel for your car and portable generators became super scarce. We learned stuff in your fridge and freezer goes bad pretty quickly without electricity, I remember ice-cream shops were giving away their product. We also learned that electricity is required to pump water out of your basement. No problem, fire up the portable generator and solve both problems, except no store in the tri-state area had a generator to sell you. If you had one, it became very difficult to get gasoline.
We learned that gas stations couldn’t open because they needed electricity to pump fuel out of their tanks. Even the handful of gas stations that did have power, they quickly ran out of fuel and couldn’t get resupplied because their distributor wasn’t able to pump fuel into their delivery trucks. Long lines developed as people stood with empty gas tanks waiting their turn. Guns were being pulled out when some person attempted to cut the line. Then when the 2020 Covid pandemic hit us, supermarket shelves went empty and stayed empty for months. I remember basic paper products, and staples paper napkins and yeast were not to found. Now imagine both situation occurring at the same time, plus lack of law enforcement, plus store and shop owners unwilling to take cash, credit cards, or digital payments. Maybe that’s when you whip out one of the shiny diecast cars you purchased from me and start haggling.
The question I wanted Andy to follow up with was “Mr. Munger, what should we do now so we and our children and grandchildren can survive this ‘different and very dangerous environment’?”
But the conversation did not go there. It went towards the cause of the US dollar to become worthless. Realize that at least on financial matters, Charlie has a 5+ decade track record of been right far more times than he has been wrong; He pointed to inflation. “It’s what causes economies to collapse.” And cited examples of the Roman Republic, the collapse of the Weimar Republic and the rise of Adolf Hitler in German, and current day Latin America.
Munger said, “Inflation is a very serious subject, you could argue it is the way democracies die.”
Okay, I can see with the inflation rate in Venezuela over 200%, I do see how that ushered in an even more authoritarian type of government and how poverty has become infectious in so many South American countries. However, my history is a little foggy when it comes to the Weiner Republic, which collapsed before we were alive (I think I skipped that high school history class that day). But I do remember a story from that time period.
There was a time when German currency was so worthless that even a wheel barrel of German Marks couldn’t buy a loaf of bread. The story I heard was that a man pushed his barrel of German Marks to the butcher and the baker to see what he could buy. But in the process, he left his wheel barrel full of money outside while he ran inside the store to see what he could purchase. When he went back outside he found his money dumped on the street and his wheel gone.
(Photo credit: Bundesarchiv).
It will be a “different type of environment” when a wheel barrel is worth more than a full barrel of US dollars, a government issued social security check, or all the money in your Venmo account.
If you consider the length of human history, this event happened not that long ago. This is an excerpt from Britanica*^.
Hyperinflation in the Weimar Republic, economic disaster in the Weimar Republic in 1922–23 that impoverished millions of German citizens. During World War I, prices in Germany had doubled, but that was just the start of the country’s economic troubles. The new German Weimar government was bound by the Treaty of Versailles, which was designed to ensure that Germany could never wage war on their neighbours again. The treaty’s terms put the Weimar government under significant financial pressure. The huge amount the Germans had to pay the Allies in reparation for the war meant they couldn’t afford to buy imported goods, and the loss of their colonies meant they couldn’t rely on cheap raw materials. At the same time, billions of marks hoarded during the war suddenly came back into circulation.
Quick sidebar: This same event will fuel the demise of the US green back when people realize our currency is quickly losing value. Although the amount cannot be precisely tracked, the Federal Reserve Board of Governors recently estimated that foreigners held $950 billion in U.S. banknotes at the end of the first quarter of 2021, or about 45% of all Federal Reserve notes outstanding, including two-thirds of all $100 bills***. That’s kind of amazing. With all the paper money that the Fed has printed in its history, they estimate 45% of it isn’t even in our country! So that’s one reason why we don’t feel the effects of inflation as much as ay a country like Ecuador or Belize when their country goes on a tear and prints money to pay for stuff. We don’t feel the full force of inflation because people outside our country are taking our money out of circulation and squirrelling it away.
The rising cost of goods combined with a dramatic increase in the money supply created perfect conditions for inflation. Before World War I, the exchange rate was just over four marks to the U.S. dollar. By 1920 the value of the mark was 16 times less. It stabilized at 69 marks to the dollar for some months. The Weimar government was still in a position to get a grip on the economy; instead, it chose to print yet more money in order to pay the reparation debt. By July 1922 prices had risen by some 700 percent, and hyperinflation had arrived.
The government had to print million-mark notes, then billion-mark notes. By November 1923 one U.S. dollar was equivalent to 1,000 billion (a trillion) marks. A wheelbarrow full of money couldn’t buy a newspaper. Shopkeepers couldn’t replenish their stock fast enough to keep up with prices, farmers refused to sell their produce for worthless money, food riots broke out, and townspeople marched into the countryside to loot the farms. Law and order broke down. The German attempt at democracy had been completely undermined.
If you listen to the handful of Charlie Munger’s interviews, the one piece of advice he gives over and over is “Don’t overspend your income.”
It’s sound financial advice, but we as a nation are not heeding it. We continue to spend more way more than we make. And not by a little. And the solution? Just keep raising my credit limit. This addictive behavior cannot continue indefinitely, right? We keep kicking the can (i.e. debt repayment) down the road, but there will come a time where the can gets too big and heavy to kick. Also you eventually run out of road -that’s when nobody wants to buy the stuff in your can.
Companies throughout the US and the world are not growing revenue at exponential rates to keep up with our level of spending we are doing. For most of the customers and me, it’s a big goal just meet last year’s sales, let alone to grow it exponentially for decades.
The US spends more than it collects and covers by congress lifting the debt ceiling and the Fed issuing IOUs (i.e T-Bills and T-Bonds) to anyone or any institution willing to exchange the IOU for cash. The world cannot accept an infinite number of IOUs.
As a toy monger writing less than 97 years before the Charlie Munger predicted collapse of the US dollar, I see the cracks in the dam. So far, we have only applied patches and we haven’t addressed the root of the problem, which is over spending. The amount of water (debt) the dam is holding back is increasing in volume. At the same time the basic support structure of the dam (i.e. the wallet’s of middle class Americans) is getting weaker. I can easily list a dozen events that can be construed as cracks in the dam, but I’ll just list the top 3 that I see. War, businesses/banks failing (throughout the world), and a large percentage of our population willing to accept morally bankrupt people for leadership positions.
Charlie died before he gave us advice on what we can do to prepare for “the currency is going to zero,” prediction. I guess when your 99 years of age, you don’t need to concern yourself with stuff like that. However, I noticed that it didn’t stop other people from using Charlie’s quote to suggest what we should do. They would quote Charlie Munger and then give you advice to buy stuff that they are already heavily invested in (e.g. gold and crypto).
So I guess I should also do a similar pitch into what I’m heavily invested in too. “Buy more diecast cars now before your dollars are worthless.” After the financial apocalypse, diecast cars are expected to greatly increase in value because you will be able to trade them for food, gas, and to people who know how to turn the zinc alloy in the metal cars into bullets. But seriously, the advice I have is simple and has not changed for centuries.
Stay tune next week as I pitch it. I also have a working theory that when our currency goes to zero, a series of end-time prophecies in the Bible will be fulfilled. Some of them are very unpleasant. Here is an upcoming trailer:
Then the seven angels who had the seven trumpets prepared to sound them. The first angel sounded his trumpet, and there came hail and fire mixed with blood, and it was hurled down on the earth. A third of the earth was burned up, a third of the trees were burned up, and all the green grass was burned up. -Revelations 8: 6-7
For those of us who survive the above event, I wonder if our insurance premiums will cover something like this. It’ll certainly be a ‘different type of environment’.
*”Charlie Munger”, Wikipedia, https://en.wikipedia.org/wiki/Charlie_Munger
https://www.blanchardgold.com/market-news/the-u-s-dollar-is-only-51-years-old-could-it-go-to-zero/
^”The Truth About Warren Buffets Investment Track Record Morning Brief”, , Yahoo Finance by Sam Ro, 3/1/2021, https://finance.yahoo.com/news/the-truth-about-warren-buffetts-investment-track-record-morning-brief-113829049.html
^^”If You Invested $100 in Berkshire Hathaway in 1965, This Is How Much You Would Have Today”, Motley Fool by Bram Berkowitz, 1/3/2023, https://www.fool.com/investing/2023/01/03/if-invested-100-berkshire-hathaway-1965
*~”History has shown that there is a 100% chance that FIAT money fails”, by LedgerMan, 1/14/2020, https://medium.com/@ledger_man/opening-premise-history-has-shown-that-there-is-a-100-chance-that-fiat-money-fails-aa4dabb9cbbd
**https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/
*^”Hyperinflation in the Weimar Republic”, 5/6/2022, https://www.britannica.com/event/hyperinflation-in-the-Weimar-Republic
***”The Innocent Greenbacks Abroad: U.S. Currency Held Internationally”, 10/18/2022, by Christopher J. Neely. https://www.stlouisfed.org/on-the-economy/2022/oct/innocent-greenbacks-abroad-us-currency-held-internationally
Back to the top |
