The American Business Journal: Warren Buffett’s Plan for economic recovery Warren Buffett’s Plan for economic recovery ================================================================================ admin on 11 December, 2011 09:30:00 Just give him five minutes. That’s all the time he would need to fix the lackluster, returning-from-collapse American economy, says investment mogul Warren Buffett. “I could end the deficit in five minutes. You just pass a law that says anytime there is a deficit of more than three per cent of the GDP, all sitting members of Congress are ineligible for re-election,” Buffett stated. “Then the incentive would be in the right place.” Buffett, the 81-year-old native of Omaha, Neb. is considered among the world’s top investors—perhaps the godfather of the stock markets—and in a time when many Americans have lost trust in these markets, Buffett continues to have confidence in both the markets and the United States as a whole. “We’re a work in progress still in America but it’s a terrific work in progress. We came out of the Second World War with our debt at 120 per cent of GDP, and now it is less than 60 per cent,” Buffett said in a report. “In this country, we don’t avoid problems, but we solve problems. This idea that we’re going to live in some big, trouble-free world isn’t going to happen. We’ve come through the Great Depression, World Wars, a Civil War…this country works and it always works.” With a stance like that coming from one of the world’s finest investors, it’s easy to bestow confidence in Buffett’s opinion. In 2010, Forbes reported Buffett’s net worth as $50 billion, but he is not your ordinary billionaire. While certainly financial secure, Buffett still acts and lives like the working class, the group most hurt by tough economic times. Buffett isn’t one for extravagance. You won’t even find a computer or calculator in his book-laden office. Even the website of Buffett’s holdings company, Berkshire Hathaway Inc., portrays a modest, simple look. No photos or specialties will be found here. Berkshire Hathaway is a major conglomerate with a family firm feel, where all the usual corporate vanities are absent. Charles Munger, Buffett’s investing assistant and Vice-Chairman of Berkshire Hathaway, describes Buffett as, “Financially conservative…a far cry from the group who caused the American recession.” Perhaps Buffett’s attitude stems from his hardworking home state of Nebraska. Even Berkshire Hathaway is based in Omaha, the largest city in Nebraska, and more than 1,200 miles from the hustle of New York City’s Wall Street. So popular, however, with his shareholders, the annual general meeting of Berkshire Hathaway is held in the usual setting of an Omaha stadium. Every year, Buffett presents his speech, a delightful mix of business acumen and modest humour, to the more than 20,000 in attendance. Said Buffett, “Some people are a lot better at certain things than others. Some people can sing a lot better than I can. I’m better at making money than most people.” Housing and jobs most damaged Fixing the American economy is a bit of the classic chicken and egg story. In order for jobs to return, the construction and housing sectors—employing millions—must return. But in order for the housing market to return, Americans must have the capital from a job to afford such housing. “We will come back big time on employment when residential construction comes back. We were way overproducing in housing, so it’s not a big surprise we ended up with too many houses,” Buffett stated, joking, “We’re not going to blow them up, and we’re not going to have kids get married at 12, so there has to be a natural correction. The only way for that correction to take place is to have household formations exceed new construction by a significant amount for a significant period of time. “We’re stocking up housing inventory. I don’t know when we’re going to hit that equilibrium, but it isn’t five years from now. I think it could actually be reasonably soon.” And when this happens? “The unemployment rate will move down a long way. I think within a few years we will see it back at six per cent,” Buffett said. The national unemployment last hovered around six per cent in 2008, when the national average was reported at 5.8 per cent. “It depends how housing turns.” It’s certainly an economy that needs fixing. According to reports from the U.S. Bureau of Labor Statistics, foreclosures were up seven per cent in August, while defaults increased a staggering 33 per cent, the largest month-over-month increase in nearly four years. Foreclosure filings have been reported on one in every 570 houses in the United States. First-time default notices were filed on nearly 80,000 U.S. properties in August, a nine-month high. In terms of unemployment, the national average continues to float around nine per cent, although the jobless rate in Buffett’s Nebraska ranks second lowest in the nation, at 4.2 per cent. “We have gone through I don’t know how many recessions, perhaps 15, in the history of this country. Our system overshoots periodically and in this particular case we had a huge bubble,” Buffett said in the report. “The fact that there is a correction after that should not be unexpected. But our system always comes back and it will again this time. It already is.” More than 2.5 million jobs have been lost since Barack Obama was named President of the United States in 2009. However, in the many companies invested in and/or owned by Buffett, the hiring slowdown hasn’t been as severed. Buffett commented, “You hire when you have demand. We’re seeing a lot of demand in a lot of places, but we’re not seeing it in the construction field yet.” “If you take some of our large businesses, the ones that serve industry, we are hiring people now. We’re not back up to where we were three years ago, but some of our consumer businesses are tied to residential housing and they are not hiring yet. They will be in six months or a year and the demand is coming, you can feel it. When demand comes, employment follows, and that is starting to follow.” Buffett on stimulus In February 2009, the Obama administration formed the American Recovery and Reinvestment Act, an economic stimulus package to the tune of $787 billion, in the hope of boosting American job creation. It was a costly move by the federal government, one that has not produced equal results, however, Buffett feels the government is not fully to blame. “People may get their expectations too high. If you look at these 15 recessions we’ve had since we became a country, half the time no one knew what a fiscal policy was, the system cured itself,” Buffett said in the report. “The government can do things to make it worse. There are things to work through and really if we have too many houses, what can government do? “Government gets blamed too much and it may get too much credit when things do improve. Government is a factor, but I would say by far the biggest factor is the corrections in the business cycle over time. I would call it the natural regenerative powers of capitalism. Capitalism works.” The investment philosophy So in which areas does Buffett like to invest? “We look for businesses that have some intrinsic characteristics that give it a durable competitive advantage,” Munger said. “It is a very simple idea.” As an example, in the 1980s, Buffett and Berkshire Hathaway invested in Coca-Cola, and within four years the investment quadrupled in value. Today, the company still owns shares in Coca-Cola worth as much as $10 billion. Buffett has also invested in other big-time brands like American Express, Walt Disney, and Geico. As such, Buffett has grown his investment fund by 20 per cent every year. Clearly, much of the philosophy is, as Munger states, based on a simple idea, but also about thinking big, often putting all the investment eggs in one basket. As Buffett states, “Don’t just buy stocks, buy businesses. Become a business owner.” “In the end, you can run modest deficits, but you can’t run huge deficits year after year. If you could run a deficit 10 per cent over GDP and nothing bad would happen, then we would have been doing it a long time ago, but it has consequences,” Buffett said. “But we can tackle that…Fear comes on fast and confidence comes back slowly. This will take time. “The problems are here and they need to be addressed, but nothing is going to sink this country. If you want to bet against America, you’re going to lose a lot of money.”