Commentary by Alice Schroeder
June 4 (Bloomberg) -- To the unschooled ear, Warren Buffett’s reassuring words that “America’s best days lie ahead” and that he’s buying U.S. stocks sound prescient, not preposterous.
But fair warning -- he’s not as bullish as he sounds.
Buffett has been right so often that what his words mean, and whether he is right now, are important questions. His skill as a forecaster has a lot to do with his psychology: a buoyant optimism tempered by extreme caution that let him score killings on stocks such as Geico and American Express Co. while steering clear of speculative bubbles, leverage, subprime mortgages, and trying to figure out a rescue for his pal Hank Greenberg’s company American International Group Inc.
Was he just talking his book?
It doesn’t really matter. As much as he loves money, Buffett loves his reputation a whole lot more. He never risks going on the record unless he is pretty sure he won’t be found wrong later.
What makes him so certain? He has explained his ebullient view of the economy using historical analogies instead of economic data. He has said that trying to call the bottom of the market is futile; buy into fear. The U.S. has surmounted worse troubles before, and it will survive this, too: “Your children and grandchildren will live better and better” than you.
Buffett seems to hearken back to mid-20th century America, when each decade brought us a higher living standard. The concern has been whether he is extrapolating from his own experiences rather than analyzing the future.
There’s evidence, though, that Buffett is awake to America’s problems. He says there will be no quick rebound in consumer spending, the economy has “fallen off a cliff,” and we are now “fighting a war.” Berkshire Hathaway Inc.’s real- estate arm just estimated that the backlog of unsold houses is double the official figures.
The state run by Buffett’s friend, Arnold “Governator” Schwarzenegger, is broke. Peter Kiewit Sons’ Inc., the company that occupies every floor of the building Buffett works in except his own, is getting rich repairing America’s decayed infrastructure. Buffett himself is part of the headwind blown by our aging population against gross-domestic-product growth.
Buffett doesn’t enjoy watching Berkshire labor under the burden of U.S. regulations and litigiousness, pay taxes that fund expensive military commitments overseas, and struggle against the financial quicksand of the health-care system. Recently, Berkshire’s profits have been hurt by a U.S. economy with too few jobs and over-reliance on debt-driven consumer spending.
Buffett and his partner, Charlie Munger, touched on this point at the Berkshire shareholder meeting when they referred to labor concessions being made to save jobs and described what they view as China’s inexorable economic expansion. Rather than dwell on his belief in Ricardian theory of comparative advantage, under which U.S. workers have little bargaining power to increase their incomes, Buffett, as is typical, framed this issue positively: A recovery will come from “unleashing human potential,” that is, productivity gains.
That’s a rational perspective. I believe Buffett’s optimism about the country is genuine. It’s a big-picture sort of optimism, though. Economists who are debating whether there will be a recovery in 2010 are living in a different world than Buffett, whose comparisons to periods as traumatic as World War II and the Civil War should sober anyone who thinks we are going to turn the economy on a dime.
Somebody could have said: “Your children and grandchildren will live better than you” in 1932, and that would have been reason to buy stocks, as well as reason to be nervous.
Buffett has also got an ace in the hole: inflation.
His advice for protecting against inflation is, first, to increase your earning power. That’s sort of difficult these days for most of us.
Second, invest in businesses or stocks. Even if the nominal profits from a business are gouged by inflation, a good business provides some real return over time.
He’s put his money where his mouth is. While he counsels long-term investing, he trades his personal account more actively -- this is how he keeps his restless predatory instinct sated. Last year he began moving out of bonds into U.S. stocks.
But if inflation is such a problem, why only U.S. stocks? Is he just patriotic, or shilling for President Obama?
Hard to Separate
Buffett doesn’t shill for anybody but himself, but with him it’s also hard to separate patriotism from prudence. He has been slow to invest outside the U.S. and has always described major U.S. stocks as global enough for most investors.
Moreover, he always advises that the financially naïve should act with even more caution than he displays himself. Years ago, he recommended only municipal and government bonds as investments for divorced women. It’s inconceivable that he would tell the Average Joe it’s OK to buy global when he isn’t.
Once you disentangle all these strands -- the cautious Buffett who tends his reputation, Buffett the long-term optimist, Buffett the realist about economics, Buffett the hawk on inflation, and Buffett the domestic investor -- it turns out that Buffett is bullish, but not as bullish as he sounds. His optimism is long-term in nature, and inflation is his hedge.
Consider yourself warned.
(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a senior adviser to Morgan Stanley, is a Bloomberg News columnist. She recently purchased Berkshire Hathaway shares. The opinions expressed are her own.)
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