Monday, April 14, 2008

What Warren Thinks...

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How does the current turmoil stack up against past crises?

Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy.

If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?

Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful.

The scenario you're describing suggests we're a long way from turning a corner.

I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that.

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2 comments:

astnh said...

Standard Buffettis taking on subjects that seem to be complicated by definition almost....and put them in a penetrating perspective.

I wonder how true the following statement is: "Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that...." Buffett has made some huge currency bets that tie very closely to macro to the point of inseparability issues (silver purchase in the earlier part of the decade)

Thats also, the first time I've heard LBO boom. But isn't this just giving a label to something that has been happening for a long long time?

astnh said...

This is how the previous post was supposed to look:

Standard Buffett- taking on subjects that seem to be complicated by definition....and putting them in a simple yet penetrating perspective.

I wonder how true the following statement is: "Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that...." Buffett has made some huge currency bets that tie almost inseparably to macro issues (silver purchase in the earlier part of the decade). Maybe an underlying basis for his point is that you can't separate micro and macro and to bet solely on macro without tying it into the micro is ludicrous.

Thats also, the first time I've heard LBO boom. I wonder if this is just giving a label to something that has been happening for a long long time?