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Warren Buffett was Charlie Rose's guest for the first portion of the September 30, 2011 show.

A couple of highlights:

In response to a question about the European Union, Buffett said the root problem Europe faces is that it attempted to bring multiple economies together without a common economic culture and budgeting process. (Not exactly a novel thought...) He then said the only cure is to either iron out those variances in budgeting control and economic policy or disband. Rose didn't exactly press him on which one he thought was more effective or likely but Buffett's tone seemed to make it clear he thought at some point the Euro experiment would fail.

Rose asked Buffett what he saw in 2010 when he unwound most of his positions in assets exposed to the Euro crisis that no one else saw. Buffett said the 2010 situation for the Euro was very similar to the domestic sitation in 2006. It's not like we were totally caught unaware about what happened in 2008. Even in 2006, "Everbody sorta saw it..." Basically, many people came to the same realization at the same time but once they realized how out of kilter the system had become, many basically said to themselves, "well, no one predicted we could survive at this point so maybe the system won't totally crash to a halt, maybe when things go wrong it will just slow down and give me a chance to get out."

On another topic regarding individual and corporate taxes, Rose asked if a reduction in corporate tax rates (one-time or permanent) would actually encourage firms to "re-patriate" over-seas profits back to America. Buffet's response addressed two key macro concepts:

1) any encouragement to return profits back to the US resulting from a lower tax rate might be counter-balanced by the increased incentive to try the same thing again -- outsource MORE production overseas at lower wage rates and bring it back again

2) the main reason firms are accumulating HUGE stockpiles of cash is that a) big business is actually doing quite well and b) regardless of whether the dollars are earned here or overseas, busineses are NOT identifying any NEW avenues of investment in which to "spend" those profits -- it's not uncertainty over taxes or regulation, IT'S A LACK OF DEMAND.

Earlier in a discussion about housing, one of them cited a statistic that said at the peak of the housing bubble, America had nearly $22 trillion "invested" in housing. When asked how long the housing "hangover" of inventory homes would last and continue weighing down the economy, Buffett responded that the only way the hangover will abate is by the number of households producing the demand rising to a point to absorb the current inventory glut. Again, DEMAND (or lack thereof).

Pretty obvious point.

Maybe the larger point is not so obvious. There are circumstances in which it is possible for all of the following to happen simultaneously:

* local aggregate production / demand remaining flat
* high unemployment contributing to reduced demand and downward price pressure
* communication technology, outsourcing (offshoring) and high unemployment producing flat / downward wage trends
* high corporate profits

The key is for the downward pressure on wages to outweigh any drop in demand produced by the high unemployment. Firms making goods that either sell to segments of the economy not affected by job losses or amount to essentials (gas, electric, basic communications) can continue to do well. Firms selling goods and services that are first on the mental "cutting block" for those facing reductions in income will have a very rough go of it and certainly won't expand production or employment.

That's exactly the situation we're in now. Virtually zero GDP growth, virtually zero job growth as a function of the population, flat or falling wages and a few large companies making huge profits and accumulating piles of cash with no where to invest -- they can meet demand with the people and euqipment they have.

And that's the "sorta saw it" takeaway... Equity investors focused primarly (or exclusively?) on growth through stock price appreciation rather than dividends may expose their nestegg to a great deal of risk with little upside for the forseeable future.


WTH
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2) the main reason firms are accumulating HUGE stockpiles of cash is that a) big business is actually doing quite well and b) regardless of whether the dollars are earned here or overseas, busineses are NOT identifying any NEW avenues of investment in which to "spend" those profits -- it's not uncertainty over taxes or regulation, IT'S A LACK OF DEMAND.

Earlier in a discussion about housing, one of them cited a statistic that said at the peak of the housing bubble, America had nearly $22 trillion "invested" in housing. When asked how long the housing "hangover" of inventory homes would last and continue weighing down the economy, Buffett responded that the only way the hangover will abate is by the number of households producing the demand rising to a point to absorb the current inventory glut. Again, DEMAND (or lack thereof).

Pretty obvious point.


The point that he is trying to make is pretty obvious, but it certainly isn't pretty obvious that he is right.

As I have posted about before, consumption seems to have rebounded while investment has not:

http://boards.fool.com/lack-of-consumption-isnt-the-problem-...
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Let's see, as CEO of Berkshire-Hathaway, he is involve with companies in:
Insurance
apparel
utilities
building materials
Flight training
Jet rentals
home furnishings retail
carpet
jewelry retail
Restaurants
railroads

He also owns a 5% or greater share of:

Coca Cola
Wells Fargo
Kraft Foods
American Express

In other words, there are probably very few people in the world who have their finger daily on the pulse of DEMAND in such a broad range of industries. I'm sorry, MC, but unless you can convince me Buffett is telling a bald-faced lie, I am inclined to accept his interpretation of the situation.

Cheers,

Doug
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In response to a question about the European Union, Buffett said the root problem Europe faces is that it attempted to bring multiple economies together without a common economic culture and budgeting process. (Not exactly a novel thought...) He then said the only cure is to either iron out those variances in budgeting control and economic policy or disband. Rose didn't exactly press him on which one he thought was more effective or likely but Buffett's tone seemed to make it clear he thought at some point the Euro experiment would fail.

The US too had two economic systems.....which resulted in the Civil War......just some food for thought....

Dave
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MC,

the odd thing is that to create more demand we need to cut taxes on labor......at the end of the day govt can shrink if taxes are lowered.....unemployment will abate much faster at that point....

Dave
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Let's see, as CEO of Berkshire-Hathaway, he is involve with companies in:
Insurance
apparel
utilities
building materials
Flight training
Jet rentals
home furnishings retail
carpet
jewelry retail
Restaurants
railroads



..I think "involve(d)" is too steep a word..

..mr buffett is the CEO of a holding company, the companies within that holding company run independently of the parent company, and one another..

..but I agree with you otherwise with respect to listening to the oracle from omaha..
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I think you have made a convincing case that consumption, as measured by the metrics of the official stats, has recovered. However, you haven't made a convincing argument that private investment is the problem.

If you look at the chart in the article which claims this as the thesis, it falls apart [1]:

Private investing is down from 2.2 billion to 1.8 billion in your source. This works out to be around 400 million.

Private consumption has gone from a prerecession high of 9.3 billion to 9.4 billion, or up 100 million.

A 300 million dollar lag from a total high of 11.5 billion expenditures (private investment and consumption) is a tiny fraction and does not account for the huge percentage increase in unemployment.


So where are we going to find the cause of the recession? I asked this before and no one answered. Here I'll attempt to answer the question.

First, housing starts have declined dramatically, take a look at this chart:

http://forecastchart.com/chart-housing-starts.html

They were at a high of 2,200,000 before the crash, and now are at a steady 600,000 a year. This represents a 75% haircut in new housing, and for an economy with a large chunk based in construction, it is a substantial loss.

These numbers do not show up in personal consumption, because people are still paying rent. They are not leveraging themselves into larger houses, which had been happening before the crash. This lack of leverage is the explanation for why the economy is in a recession.

Private investment is also a form of individual private leverage (spending money, or taking on loans to finance projects is a form of leverage) but I claim that new housing represents a much much larger part of the picture.

Basically, if your economy relied on lots of increasing leverage to have full employment, you are going to have problems when the leveraging comes to an end. That is where we are now.

The amount of excess housing is expected to take years, four or more. You can see the percentage of empty houses has been steadily rising

http://www.bloomberg.com/news/2010-11-15/housing-excess-may-...

The cause of this recession was excessive leveraging, causing excessive housing production. Getting rid of the excess housing inventory will take years in a healthy economic climate.



[1] http://mjperry.blogspot.com/2011/09/its-investment-spending-...
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In other words, there are probably very few people in the world who have their finger daily on the pulse of DEMAND in such a broad range of industries. I'm sorry, MC, but unless you can convince me Buffett is telling a bald-faced lie, I am inclined to accept his interpretation of the situation.

The numbers suggest that real consumption has recovered. That's a fact. It's not my opinion. Interpret it as you wish.
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"The point that he is trying to make is pretty obvious, but it certainly isn't pretty obvious that he is right."

Actually it is for those not partisanly blind.

"As I have posted about before, consumption seems to have rebounded while investment has not"

The idea that businesses are not investing because of uncertainty over taxes or regulations is a silly right wing meme designed to fool the gullible. That may work on boards like RECF or ConFools, but anyone with half an understanding of how businesses work would not fall for it.

If you want to know why investment has not rebounded you might want to look at capacity numbers. You would realize that businesses have lots of excess capacity. A deeper look at those numbers would further show that the main reason the excess capacity numbers have dropped since their 2008 highs is because businesses are scrapping some of their excess capacity. They don't need it.

http://boards.fool.com/quotyes-theres-excess-capacity-here-a...

Businesses can easily meet demand (and more) with current capacity. Why would they invest money in more capacity when they already have too much of it?
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"The point that he is trying to make is pretty obvious, but it certainly isn't pretty obvious that he is right."

Actually it is for those not partisanly blind.


If you are suggesting that I'm partisanly blind, then this is patently ridiculous. I don't vote Republican, Democrat, or even for the Libertarian Party. I haven't been supportive of Republicans or Democrats, and I'm a staunch critic of the policies and actions of both parties.
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See link below. Very disturbing. What do you think?

http://finance.yahoo.com/blogs/daily-ticker/going-lot-worse-...
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As I have posted about before, consumption seems to have rebounded while investment has not:


I think if you run the consumption curve against a GDP curve, you will understand the investment curve better.
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As I have posted about before, consumption seems to have rebounded while investment has not:

I think if you run the consumption curve against a GDP curve, you will understand the investment curve better.


And I think taking GDP too seriously is a mistake. GDP was high during WWII as we spent a lot of money to blow stuff up, but that doesn't mean it was a positive for the economy.
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Businesses can easily meet demand (and more) with current capacity. Why would they invest money in more capacity when they already have too much of it?

The fact that there is excess capacity in certain areas does not mean there is excess capacity everywhere. THAT is the problem created by government intervention, and THAT is the problem with government intervening to make sure that the problems of excess capacity in certain sectors of the economy do not correct themselves.
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As I have posted about before, consumption seems to have rebounded while investment has not:

And as I have explained to you before, we are spending an extra $2 trillion a year on oil and gasoline, which doesn't produce a single extra job since 2007 when gas prices were $2.40 a gallon to now, when they are $3.80 a gallon.

We are spending the same amount of money, we're just spending it on things which don't produce jobs instead of on new housing, furniture, home additions, automobiles, and clothes.

You are measuring "dollars", which is not at all the same thing as "consumption."
 
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As I have posted about before, consumption seems to have rebounded while investment has not:

And as I have explained to you before, we are spending an extra $2 trillion a year on oil and gasoline, which doesn't produce a single extra job since 2007 when gas prices were $2.40 a gallon to now, when they are $3.80 a gallon.

We are spending the same amount of money, we're just spending it on things which don't produce jobs instead of on new housing, furniture, home additions, automobiles, and clothes.

You are measuring "dollars", which is not at all the same thing as "consumption."


How ironic that you of all people would make this argument! From your Keynesian viewpoint, it shouldn't matter. Spending is spending.
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From your Keynesian viewpoint, it shouldn't matter. Spending is spending.

MC,

you really have no clue how keynsians think.....none....you shut off if you hear any idea you dont like.....you dont even mull it over....and give in the same vein a retort....

Keynsian economics is not some simply set of rules....ie spend spend spend.....that is a retort from somewhere out in the body politics that is very unthinking.....or ignorant.....MC I am not calling you personally ignorant for saying it......just the comment is said dumbly by a large number of well led folks......dumb followers of a creed.....

Dave
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The numbers suggest that real consumption has recovered. That's a fact. It's not my opinion. Interpret it as you wish.

It depends on what you mean by "recovered." One percent total increase over four years is very close to zero.

If you were business owner, how much would you be willing to invest in order capture almost zero growth? How much do you _need_ to invest to capture almost zero growth?

Correct answer: Almost zero.

FWIW, one of the components the government uses to calculate private investment is residential construction, and it is a pretty big component. IIRC, it is 25%-30% of private investment, something like that.

I don't have the numbers in front of me so this next part might be a little off, but it is pretty close. Residential construction is down by well over half from the peak. If just that component alone returned to 2007 levels then private investment in total would also be at 2007 levels--just like consumer spending. Free free to check my numbers, but it is reasonably close.

However, as well know we just went through a housing bubble. Residential construction was artificially high through most of the 2000s (obviously driving that component of private investment artificially high as well), and now there is a glut of housing stock on the market. I noticed that your economist looked at investment starting more or less at the peak of the bubble. I think he might have been cherry picking. Or he's not smart enough to know what is included as private investment.

As an aside, one thing that really annoys me about economists with a political agenda like the guy in your first link, is that they frame everything with the lens of tax rates, and assume that everything in the economy can be explained by taxes. But their explanations ignore really big important things like housing bubbles.

As the OP said (quoting Buffett) there is a glut of housing on the market, and until that glut goes way there won't be much demand for new construction. Makes sense to me. But your economist thinks that in fact a huge housing glut really has nothing to do with investment, it all comes down to uncertainty over future tax rate.

I don't care where that guy teaches college, it is hard to take clowns like that seriously.
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In other words, there are probably very few people in the world who have their finger daily on the pulse of DEMAND in such a broad range of industries. I'm sorry, MC, but unless you can convince me Buffett is telling a bald-faced lie, I am inclined to accept his interpretation of the situation.

I have caught Buffett in sufficient false but self-serving statements to assume that he is always talking his book and that any agreement with reality is pure coincidence.

Just as one example, Buffett is publicly determined that an estate tax is required to prevent the amassing of control of capital in a few hands - and there are few if any better cases than Berkshire Hathaway to demonstrate that the estate tax *causes* the amassing of control of capital in a few hands. One set of which happen to be on the end of Buffett's arms.
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