"Get your facts first, and then you can distort them as much as you please." (Mark Twain)

Monday, May 02, 2005

Mr. Bubble 

Warren Buffet still claims to be bullish on American economic power, but the devil is in the details:
In his answers to shareholders' questions, Buffett made it clear that he remains concerned about the trade deficit and the U.S. dollar, although he is bullish on the long-term strength of the U.S. economy. But he and [Berkshire Hathaway vice-chairman Charles] Munger issued stern new warnings about the residential real estate "bubble," the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States....

Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices].... [sic]

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C."

Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre...."

Buffett [on the trade deficit and the value of the dollar]: "It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these....

"When you have far greater sums than ever before, in one asset class after another, that are held by people who operate on a hair-trigger mechanism, then they lend themselves to more explosive outcomes. People with very short time horizons with huge sums of money, they can all try to head for the exits at the same time. The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy...."

Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences."

Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences."

Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences."

Buffett to Munger: "What do you think the end will be?"

Munger: "Bad."

Buffett: "We're like an incredibly rich family that owns so much land they can't travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece.

"That scenario couldn't end well. And we, also, keep consuming more than we produce. It can go on a long time. The world has demonstrated a diminishing enthusiasm for dollars in the last few years as they get flooded with them – every day there's $2 billion more going out than in. I have a hard time thinking of any outcome from this that involves an appreciating dollar.

Of course, Buffet could be wrong about all this. I mean, after all, it's not like he's an expert on financial matters, or anything.

 

Comments:

 

Post a Comment