Warren Buffett conducted an interview with CNBC on Thursday, July 12 2012. For the first time in his lifetime, Warren Buffett said something bad about the U.S. economy (shock)! Coming from the King of Optimism, these words were like an “abandon ship!” signal. This has never happened before, because Buffett needs to adhere himself to the public by saying good things since the public only wants to hear the good news. Buffett never said anything negative about anyone or anything; all that come out of his mouth was a steady stream of good words “I couldn’t have done better myself, things are great, the economy will rebound to a new high in a few years, don’t worry guys, etc”. Guess all people turn honest when they realize they only have a few more years to live (Buffett has cancer). Here’s what he said:
- “In the last couple of months (especially last month), Europe has gone downhill pretty fast whereas in the last 3 years, Europe was flat.” Buffett’s usually voice, even in the crash of 2008, was “everything’s great, the economy will rebound, the Feds can save us, etc”. Not anymore. You might no be able to trust a person’s words if he’s always optimistic, but you can definitely trust an optimist’s pessimistic beliefs.
- “In general, the broad economy (across the board) has slowed down real fast over the past 1 1/2 months, including in the U.S.” Wow, never thought I’d hear that from Buffett.
- “I don’t know why businesses across the country are so spooked all of a sudden. I just know what’s happening.” Looks like things are happening too fast.
- “Before, I said that the economy will rebound when real estate rebounds. But now I see that the pickup in real estate isn’t nearly enough to offset the downturns in the economy.” Wow. “NOT NEARLY ENOUGH” is essentially saying that the downturn is HUGE.
- “The usefulness of the Fed’s monetary easing policy is over. When interest rates are below zero (inflation-adjusted), you have no more room to ease.” Never in the past has Warren Buffett said anything negative about Bernake or the Fed. This time, he’s to be telling the truth.
- “Most people think that banks don’t want to lend to businesses. That’s not true. The banks are making a quarter of a percent on their cash, whereas they’d rather make 4 – 5% from loaning to businesses. However, there just isn’t any demand!” Wow. Seems like something really did spook businesses over the past month.
- “I’m going to wait and see what happens. But to some extent.” This seems contradictory, because if you say “wait and see”, you’re not going to say “to some extent”, and vice versa. I think this means that Buffett has already taken action is selling across the market. This is the King of Optimism’s equivalent of saying “SELL!”
- “People are hoping that the Fed will save the economy and drag us out of this recession. Truth is, the usefulness of the Fed’s policy is over! We should be focusing on how to make Congress effective again instead of asking the Fed for help.” Congress is even more ineffectual.
- “I can’t say who I got my information from, but I did call some people in Europe.” Obviously, Mr. Buffett has connections in high up places.
Here are my thoughts on Warren Buffett’s interview, the economy, and the market.
- Buffett is absolutely right. I too believe that the market has topped. Here’s why:
- Sentiment data is mixed. This is characteristic of market tops, which are long and flat. The sentimental indicators during market bottoms all point downwards, because market bottoms are usually V shaped, while they all point upwards during the middle section of a bull market because the market has been going straight up for a long time.
- Everyone expects the Fed to save them. In other words, they’re grasping onto a desperate hope.
- According to InTrade.com, people predict the probability of a recession to be 11%, which is ridiculously low. This is characteristic of market tops, when the majority of investors are hanging onto blind hope, even when many fundamental inidicators (e.g. growth, earnings) are pointing downwards.
- Don’t expect Congress to do anything this year. Election years are usually do-nothing years, as Congressmen are too busy bickering and pointing fingers at each other to worry about the economy.
In short, things will go down.
Disclaimer: I am not short. I merely intend to buy when the market falls enough.