Warren Buffett recently discussed a variety of topics on CNBC that are important for investors and all Americans in a very uncertain economic environment.
Buffett, the CEO of Berkshire Hathaway and the world’s most famous investor, is surprisingly very optimistic on the economy. In the past, Buffett called for the government to act aggressively to prevent a second depression, comparing the situation in late 2008 to a Pearl Harbor moment.
Buffett, for the first time, is calling on the government to scale back both fiscal and monetary policy. Buffett has joined the large chorus of people who have called for Federal Reserve Chairman Ben Bernanke to end the second round of quantitative easing, or QE2.
Buffett also called on President Barack Obama (Buffett openly endorsed him for president) to cut back on federal spending. Buffett stated that inflation is the “ultimate tax,” and that having deficits of 10 percent of GDP, like we have now, is unsustainable.
Buffett thinks that the best method to tackle the ballooning deficit is by upholding existing agreements on pensions and healthcare, but cutting benefits for future public workers.
Buffett sounded like a super-bull on the jobs recovery. He thinks the unemployment rate will be in the "low 7s" by the elections in 2012.
In general, I tend to ignore economic forecasters, however, Buffett — who owns dozens of businesses through Berkshire Hathaway in every industry one can think of — is someone to be listened to on his macro calls.
Two examples: In 2003, Buffett called credit-default swaps (CDSs) “weapons of mass destruction.” In 2008, AIG needed an $180 billion bailout due to their massive issuance of CDSs, which went in the wrong direction.
In 1977, Buffett stated that he was getting ready for inflation. In the late 1970s and early 1980s, America experienced some of the worst inflation in its history with interest rates reaching high double digits.
However, I am highly skeptical of Buffett’s claim on unemployment.
Right now, unemployment is 9.0 percent, but the situation is really worse than the headline numbers.
While unemployment decreased from 9.4 percent in January 2011 to 9.0 percent in February 2011, this was because more people dropped out of the labor force. People who have dropped out of the labor force are no longer included in the unemployment survey.
Unless Buffett is expecting huge amounts of people to drop out of the labor force, I highly doubt we will get from 9.0 percent to 7.0 percent unemployment in a year and a half. Just to maintain the current employment levels, the economy must add 250,000 jobs a month.
While, the numbers for March are coming out tomorrow, last month only showed an employment increase of 37,000 jobs. Unless the economy is producing 500,000 new jobs a month (highly unlikely according to everyone), or massive amounts of people are dropping out of the labor force (possible, but not a good thing), there is no way unemployment will be 7.0 percent in November 2012.
On the investment front, Buffett was bullish on stocks and bearish on bonds. He doesn't like long-term, or even short-term bonds, which carry less inflation and interest rate risk.
Buffett stated that “for the last few years I would vastly prefer to own common stocks than fixed-dollar investments over a five- or 10-year period. I don't know any about the next five hours or five days.”
Buffett believes that investors running to the flight of safety of Treasury bonds are making a huge mistake.
Buffett, as in the past, doesn't believe in investing in commodities. With stocks Buffett is able to estimate an intrinsic value for a company, and receives a real return in the form of capital gains and dividends.
However, the commodity market is just a game of speculation, according to Buffett. The reason is that when you buy a commodity you are hoping to sell the commodity to a future buyer at a higher price.
The commodity itself produces nothing, so an investor is just really hoping to sell to the “greater fool,” which is a theory that investors can profit by purchasing securities regardless of valuation because there will always be someone who is a bigger, or greater, fool to sell to.
While many investors have used this method of investing both with stocks and commodities, Buffett is emphatically against it.
Buffett is a genius stock picker and is able to find undervalued companies even when the market overall is expensive.
Buffett still likes the old-fashioned, boring industries that are inexpensive and have high returns on equity. He likes insurance companies (Berkshire Hathaway is officially an insurance company), food companies (such as See’s Candies, which he owns), soda (he owns a huge stake in Coca-Cola), and underwear like Fruit of the Loom, which Berkshire Hathaway bought out.
Buffett offers a very optimistic view for the U.S. economy and cautions investors from investing in bonds and commodities.
However, I recommend investors to be cautious on everything.
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