Global Manufacturing Sags Again in February: U.S. the Culprit!

Tuesday, March 6th, 2012

After rebound­ing from con­trac­tion in Novem­ber last year the global man­u­fac­tur­ing sec­tor finds itself on the brink of stag­na­tion again. The GDP-weighted man­u­fac­tur­ing PMI that I cal­cu­late for the major economies fell to 50.8 in Feb­ru­ary from 51.5 in Jan­u­ary, but is still higher than the 50.3 I recorded in Decem­ber last year.

The U.S. ISM Man­u­fac­tur­ing PMI’s fall to 52.4 in Feb­ru­ary from 54.1 in Jan­u­ary con­tributed 0.6 points to the fall in the GDP-weighted PMI. Exclud­ing the U.S., growth in the man­u­fac­tur­ing sec­tor in the rest of the world remained basi­cally unchanged.

Although still indi­cat­ing con­trac­tion at 49.0 the Markit Euro­zone Man­u­fac­tur­ing PMI shows that the man­u­fac­tur­ing sec­tor in the region is stabilizing.

Growth in Greater China is accel­er­at­ing, with my sea­son­ally adjusted CFLP Man­u­fac­tur­ing PMI up to 51.9 from 51.0 in Jan­u­ary, while the man­u­fac­tur­ing sec­tor in Tai­wan is at long last grow­ing again. The growth out­look in the other BRICS coun­tries has turned for the bet­ter, with South Africa’s PMI surg­ing to 57.9 from 43.2 in Jan­u­ary while Brazil’s PMI rose to 51.4 from 50.6.

Sources: Markit*; Li & Fung**; Kag­iso***; Plexus Hold­ings****; ISM*****.

Sources: Markit*; Li & Fung**; Kag­iso***; Plexus Hold­ings****; ISM*****.

Tags: Amp, Brazil, BRICs, Brink, Contraction, Culprit, GDP, Greater China, Growth Outlook, Hypho, Ism Manufacturing, Kagiso, Manufacturing Sector, Markit, Plexus, Pmi, Rest Of The World, Sags, South Africa, Stagnation, Taiwan
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YTD 2012 Country Stock Market Performance

Friday, January 27th, 2012

Below is a table high­light­ing the year to date stock mar­ket returns for 78 coun­tries around the world.  Of the 78 coun­tries shown, 59 (75%) are in the black for the year, while 19 are in the red.  Twelve coun­tries have posted dou­ble digit gains already in 2012, with Argentina lead­ing the way at 18.11%.  Rus­sia ranks sec­ond with a gain of 13.70%, fol­lowed by Hun­gary in third and Greece (yes, Greece) in fourth.

The US cur­rently ranks 33rd on the list with a gain of 4.73% year to date.  The US ranks fourth among G7 coun­tries behind Ger­many (10.88%), Italy (6.77%) and France (6.44%).  The UK has been the worst per­form­ing G7 coun­try so far in 2012 with a gain of 4%.

Last year the BRICs were sig­nif­i­cant under­per­form­ers ver­sus the rest of the world, but they've bounced back so far in 2012.  As men­tioned above, Rus­sia is up 13.70% year to date, which is the best of the BRICs.  Brazil ranks sec­ond with a gain of 10.92%, India isn't far behind at 10.50%, and China ranks fourth with a gain of 5.44%.

Tags: Argentina, Brazil, BRICs, China, Countries Around The World, Country Stock, France 6, G7 Countries, G7 Country, Greece, Hungary, India, Italy, Leading The Way, Rest Of The World, Russia, Stock Market Performance, Stock Market Returns, Stock Performance, Year To Date
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Jim O'Neill Picks the Next BRICs

Tuesday, January 10th, 2012

Jim O’Neill, cre­ator of the acronym BRICs 10 years ago, is pos­i­tive on the prospects of the BRIC economies, but also of other “growth” mar­kets such as Turkey and Mexico.

Source: Mar­ket­Watch, Jan­u­ary 9, 2012 (hat tip: The Big Pic­ture).

Tags: 10 Years, Acronym, Big Picture, BRICs, Growth Markets, Hat Tip, Mexico Source, O Neill, Prospects, Turkey
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Update on Brazil, BRICs

Thursday, December 29th, 2011

In response to Brazil is World's 6th Largest Econ­omy, Over­tak­ing UK Ear­lier this Year. Can Brazil Over­take France by 2016? What about BRICs in Gen­eral? I received a nice email from Felipe Fiel, an econ­o­mist from Brazil work­ing in the hedge fund indus­try for Fram Capital.

Felipe writes ...

Hi Mish, hope is all well with you. First of all I would like to con­grat­u­late you for your blog and out­stand­ing con­tri­bu­tion do finan­cial observers. I'm an econ­o­mist who lives in Brazil, work­ing for the hedge fund industry.

I agree entirely with you about Brazil's skepticism.

I would like to high­light that the way you show infla­tion and GDP might cause a dis­torted impres­sion to your readers.

You show GDP growth quarter-over-quarter sea­son­ally adjusted, with­out annu­al­iz­ing it, which is the norm for US view­ers. It was run­ning at almost 8% annu­al­ized growth before 2008 crises and even recently it grew at 3.2% in the 4 quar­ters before stag­nat­ing in 3Q.

For next year, even the most pes­simistic pro­jec­tions see growth at 4.3% on aver­age, which is more or less what is seen at GDP poten­tial. How­ever, I per­son­ally think we can­not growth at that rate with­out gen­er­at­ing too much inflation.

Best,
Felipe Fiel

BRIC Decade Ends as Growth Peaked

Accord­ing to Gold­man Sachs, BRIC Decade Ends as Growth Peaked

Dec 28, 2011

In the past decade, mutual funds poured almost $70 bil­lion into Brazil, Rus­sia, India and China, stocks more than quadru­pled gains in the Stan­dard & Poor’s 500 Index and the economies grew four times faster than America’s.

Now Gold­man Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerg­ing markets.

BRIC funds recorded $15 bil­lion of out­flows this year as the MSCI BRIC Index sank 24 per­cent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 per­cent­age points from Novem­ber 2001 through Sep­tem­ber 2010, has trailed the mea­sure for five straight quar­ters, the longest stretch since Gold­man Sachs fore­cast the coun­tries would join the U.S. and Japan as the top economies by 2050.

BRIC indexes may fall another 20 per­cent next year, buf­feted by the liq­uid­ity squeeze stem­ming from Europe’s sov­er­eign debt cri­sis, Arjuna Mahen­dran, the Singapore-based head of Asia invest­ment strat­egy at HSBC Pri­vate Bank, which over­sees about $499 bil­lion, said in an inter­view. Nations such as Indone­sia, Nige­ria and Turkey may over­shadow the BRICS in the next five years as they expand from lower lev­els of growth, he said.

“The slow­down we’re see­ing in the BRICs will con­tinue for most of the first half,” Mahen­dran said. “Com­pared to the U.S., cor­po­rate prof­its haven’t been that good as com­pa­nies face higher wages, higher inter­est rates and cur­rency volatil­ity, and at best, we’ll only start to see the effects of mon­e­tary pol­icy loos­en­ing in the sec­ond half of 2012.”

2011 Losses

The BSE India Sen­si­tive Index led declines among BRIC equity gauges this year, falling 23 per­cent. China’s Shang­hai Com­pos­ite Index also dropped 23 per­cent, while Russia’s Micex retreated 18 per­cent and Brazil’s Bovespa sank 16 per­cent. The 21-country MSCI Emerg­ing Mar­kets Index (MXEF) lost 20 per­cent, while the S&P 500 gained 0.6 percent.

The time to warn about BRICs and emerg­ing mar­kets was a year ago, which I did, specif­i­cally in regards to China (but also with many ref­er­ences to trade sur­plus nations and com­mod­ity pro­duc­ers through­out the year).

Mike "Mish" Shed­lock
http://globaleconomicanalysis.blogspot.com

Tags: 3q, Bric Funds, BRICs, China Stocks, Crises, Decade Ends, Emerging Markets, Fiel, GDP, GDP Growth, Global Data, Goldman Sachs, Goldman Sachs Group, Goldman Sachs Group Inc, Hedge Fund, Percentage Points, S 500, Sachs Group Inc, Skepticism, Straight Quarters
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Albert Edwards On The BRICs As A "Bloody Ridiculous Investment Concept"... And A China Hard Landing

Wednesday, November 30th, 2011

Just in time for the Chi­nese 50 bps RRR cut, we get a note from Albert Edwards remind­ing us just why this des­per­ate and sud­den move from China comes: "We have iden­ti­fied a China hard land­ing as one of the biggest invest­ment shocks next year." Not only that, but the Soc­Gen strate­gist takes a long over­due swipe at the world's most ridicu­lous con­cept, Jim O'Neill's BRIC débâ­cle: "Despite recent poor  per­for­mance investors still seem to favour EM and the BRICs. My good friend and for­mer col­league Peter Tasker came up with an alter­na­tive for the widely (over) used BRIC acronym — Bloody Ridicu­lous Invest­ment Con­cept." It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started eas­ning once again last night.

Why the feud with the BRICS?

Euro­zone equity mar­kets have suf­fered badly this year amid the cri­sis that has engulfed the region. Speak­ing to clients, they still retain a pref­er­ence for the rapidly grow­ing emerg­ing mar­kets (EM) against the highly indebted and strug­gling devel­oped economies. Yet, much to many investors' sur­prise, EM, and espe­cially the so-called BRIC equity mar­kets (Brazil, Rus­sia, India and China), have per­formed even more poorly (see chart below).

Despite recent poor per­for­mance investors still seem to favour EM and the BRICs. My good friend and for­mer col­league Peter Tasker came up with an alter­na­tive for the widely (over) used BRIC acronym — Bloody Ridicu­lous Invest­ment Concept.

As my for­mer col­league James Mon­tier always used to point out, investors are suck­ers for a good story. When you look at the evi­dence, there is absolutely no cor­re­la­tion between invest­ment returns and eco­nomic growth because investors over­pay for growth sto­ries and there is no mar­gin for error (see Dim­son, Marsh and Staunton at the Lon­don Busi­ness School 2005 — link). In addi­tion, The Econ­o­mist mag­a­zine reports that Paul Mar­son of Lom­bard Odier has extended this research to emerg­ing mar­kets. He found no cor­re­la­tion between GDP growth and stock mar­ket returns in devel­op­ing coun­tries over the period 1976–2005. A clas­sic exam­ple is China; aver­age nom­i­nal GDP growth since 1993 has been 15.6%, the com­pound stock mar­ket return over the same period has been minus 3.3%. (link)

Yet investors per­sist in the BRIC supe­rior growth fan­tasy. But it is no dif­fer­ent from many of the other invest­ment fan­tasies I have wit­nessed over the last 25 years — only to see them end in severe dis­ap­point­ment. If growth does mat­ter to investors, they should be wor­ried that things seem to be slow­ing sharply in the BRIC uni­verse, most espe­cially in Brazil and India (see chart below).

As for China...

We have iden­ti­fied a China hard land­ing as one of the biggest invest­ment shocks next year. The cru­cial dri­ver investors are miss­ing is the change in global liq­uid­ity as mea­sured by growth in EM for­eign exchange reserves (see charts below). Con­fi­dence often ebbs as growth slows and EM economies are see­ing a sharp drop in reserves and liq­uid­ity tight­en­ing. In this con­text did any­one spot the Chief Econ­o­mist of the China State Infor­ma­tion Cen­tre call­ing for a yuan deval­u­a­tion now that reserves are falling (link). Shall we call this Invest­ment Shock II?

How con­veneint of the PBOC to con­firm Edwards' the­sis lit­er­ally min­utes after this note's publication.

Tags: Bps, BRIC, BRICs, Debacle, Dimson, Economist Magazine, Emerging Markets, Good Friend, Investment Concept, Investment Returns, Lomba, London Business School, Marson, O Neill, Pboc, Peter Tasker, Poor Performance, Strategist, Sudden Move, Swipe
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"China Is Not Heading for a Hard Landing," says Jim O'Neill

Monday, October 17th, 2011

Jim O’Neill, Chair­man of Gold­man Sachs Asset Man­age­ment and the man who coined the term BRICs, explains why he thinks China is not headed for a hard landing.

Source: CNBC, Octo­ber 16, 2011.

Tags: BRICs, China, Cnbc, Gold, Goldman Sachs, Goldman Sachs Asset Management, O Neill
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Global Manufacturing PMI (Sept 2011): U.S. Shines in Suffering Global Manufacturing Sector

Wednesday, October 5th, 2011

Growth in the global man­u­fac­tur­ing sec­tor is on the brink of con­trac­tion. The global man­u­fac­tur­ing PMI that I cal­cu­late on a GDP-weighted basis for the major eco­nomic regions fell to 50.1 in Sep­tem­ber from 50.4 in August, while the JP Mor­gan Global Man­u­fac­tur­ing PMI fell to 49.9 from 50.1. The U.S. ISM Man­u­fac­tur­ing PMI masks the state of the man­u­fac­tur­ing sec­tor else­where around the globe, though. The gauge jumped to 51.6 in Sep­tem­ber, indi­cat­ing accel­er­a­tion in growth from a pal­try 50.6 in August.

While Ger­many is still show­ing signs of growth the reces­sion in the rest of the Eurozone’s man­u­fac­tur­ing sec­tor is deep­en­ing. How­ever, it seems as if the con­trac­tion in Italy is eas­ing some­what, but France, the sec­ond largest econ­omy in the Euro­zone, is slid­ing fast. In con­trast, the man­u­fac­tur­ing sec­tor in the U.K. has man­aged to grow again after con­tract­ing in August. The cold spell has spread to emerg­ing Europe as well, with Poland lead­ing the way as growth in its man­u­fac­tur­ing sec­tor is close to stalling. Turkey was the excep­tion as its man­u­fac­tur­ing sec­tor is grow­ing again.

Asian coun­tries are also suf­fer­ing. China was the major dis­ap­point­ment as the CFLP Man­u­fac­tur­ing PMI only man­aged to rise by an abysmal 0.3 per­cent­age points to 51.2 in a month that is nor­mally a very strong month from a sea­sonal per­spec­tive. The result was that my sea­son­ally adjusted CFLP PMI fell 2.1 per­cent­age points to 50.1 and there­fore indi­cates that growth in China’s man­u­fac­tur­ing sec­tor has stag­nated. It had a severe rip­ple effect on the rest of Asia. Growth in India’s man­u­fac­tur­ing sec­tor slowed sharply, while the con­trac­tion in Tai­wan, South Korea and Aus­tralia deepened.

Rus­sia and South Africa held up rea­son­ably well in the other BRICS coun­tries but the con­trac­tion in Brazil’s man­u­fac­tur­ing sec­tor quickened.

Sources: Markit*; Li & Fung**; Plexus Asset Man­age­ment****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Man­age­ment****; ISM*****.

Tags: Acceleration, Asian Countries, Brazil, BRICs, Brink, Cold Spell, Contraction, Disappointment, Economic Regions, Emerging Europe, Eurozone, India, Ism Manufacturing, Jp Morgan, Leading The Way, Manufacturing Sector, Percentage Points, Plexus Asset Management, Recession, Ripple Effect, Sector Growth, South Korea
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International Equity Markets YTD Performance (Bespoke)

Tuesday, September 13th, 2011

Below we high­light the year to date per­for­mance of the main equity indices for the 20 largest coun­tries in the world (based on mar­ket caps).  As shown, Europe's big three (Italy, Ger­many, France) have been noth­ing short of dis­as­ters in 2011.  France is down 25.4%, Ger­many is down 27.4%, and Italy is down 32.8%.  On the other hand, the decline here in the US of 9.1% year to date doesn't look all that bad when com­pared to the rest of the world.

Below is a more expanded list of 2011 stock mar­ket per­for­mance by coun­try.  While Italy is at the bot­tom of the list above, two other coun­tries have done even worse — Greece (-39.76%) and the Ukraine (-41.29%).  Of the BRICs, China now leads the way with a 2011 decline of 11.05%.  Rus­sia is down 12.21%, while Brazil and India are both down roughly 20%.

Copy­right © Bespoke Invest­ment Group

Tags: Bottom Of The List, Brazil, BRICs, China, Copyright, Countries In The World, Decline, Disasters, Germany France, Greece, India, International Equity Markets, Investment Group, Italy, Largest Countries In The World, Rest Of The World, Russia, Stock Market Performance, Stock Performance, Ukraine
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Jim O'Neill Bets The (Horse) Farm On Chinese Decoupling All Over Again

Monday, September 12th, 2011

Like a Swiss watch, Goldman's Jim O'Neill, who refuses to acknowl­edge that decou­pling between the US and the BRICs not only never existed, but was always a flawed premise to begin with, has released his lat­est dose of Kool-Aid, in which he bets the horse track on, you guessed it, Chi­nese decou­pling.... Sigh. Then again what can one expect: just like Bernanke will keep try­ing QE until QE suc­ceeds (it won't) or the mar­ket breaks; and just like the Krug­man­ites will keep push­ing for an ever big­ger fis­cal stim­u­lus (because the last one is never big enough, regard­less of how big it is), why should one expect the lat­est addi­tion to Goldman's biggest loss leader (GSAM) be any dif­fer­ent. And what makes this par­tic­u­lar episode not only tragic but very much comic, is that the for­mer "Red Knight" now sees the Chi­nese launch of a fully con­vert­ible and float­ing Yuan by 2015 as the panacea to the US stock mar­ket, and Gold­man bonus dol­drums (because when one cuts to the chase, that's really what it's all about). Lit­tle does it bother the BRICer that the advent of a new reserve cur­rency would have a dev­as­tat­ing impact not only on exist­ing risk mar­kets, but on so-called risk free ones as well. Remem­ber that 0.000% yield on last week's 4 week bond auc­tion? Yeah... that would not come back. Ever. Any­way, with the upcom­ing week sure to pro­vide sig­nif­i­cant tears, espe­cially to Euro­pean read­ers, here is at least some comic relief (yes, O'Neill does in fact "applauds" the move by the peg­ging move by the SNB — appar­ently load­ing up the asset side of your bal­ance sheet with toxic paper which may or may not exist post the Greek expul­sion is con­sid­ered pru­dent when one is a Gold­man part­ner) to start it off with.

From Goldman's Jim O'Neill

THE ST LEGERS TO THE RESCUE – OR NOT?

Another tumul­tuous week comes to an end, coin­cid­ing with the 10 year anniver­sary of 9/11 adding to a week­end mood of reflec­tion on the past decade.

There have been a remark­able num­ber of things hap­pen­ing this week, espe­cially on the pol­icy front. Unfor­tu­nately, this has not included major pol­icy devel­op­ments on the Euro­pean front, which con­tin­ues to be the biggest source of dis­tur­bance to world mar­kets. Wor­ry­ingly, the hole in which the Euro Area seems to be slip­ping into is get­ting broader and the scale of the solu­tion is get­ting tougher.

That being said, Sat­ur­day saw the Don­caster annual horse race, the St Leger. I think it was a lit­tle bit ear­lier in the month than usual. Per­haps some­one knows mar­kets need that extra help­ing hand…….( those who are more baf­fled than usual by my com­ments , there is a famous phrase re mar­kets in the UK, “ sell in May and  Go Away, Come Back on St Leger’s Day”. As we all know too well, the May part worked rather well this year.

CLEAR, BUT CONTROVERSIAL STEPS IN THE US.

The US econ­omy had a slightly bet­ter week for data with the ser­vices ISM for August and the July trade data pos­i­tively sur­pris­ing. After reduc­ing fore­casts of coin­ci­dent GDP growth, a num­ber of peo­ple are now talk­ing about pos­si­ble upside risks. To me, it looks as though the US may be grow­ing in the vicin­ity of 2 pct.

At our lat­est inter­nal CIO call at GSAM, I hosted a dis­cus­sion of our views and stance on the US with our fixed income and equity port­fo­lio man­agers. The above views of the econ­omy reflected the broad stance of views offered from a macro per­spec­tive. The equity teams offered their views based on very up-to-date read­ings from many US com­pa­nies across many sec­tors. Their con­clu­sion had a sim­i­lar fla­vor to the mes­sage from the Fed’s lat­est Beige Book: an econ­omy with mod­est momen­tum but, impor­tantly, no real signs of a down­ward shift. When it trans­lated into a dis­cus­sion of the US equity mar­ket, the gen­eral con­clu­sion was that the mar­ket is – pend­ing exter­nal events – more likely to rise than fall.

The major US high­light of the week was Thursday’s speech by Pres­i­dent Obama to Con­gress where he unveiled a larger than expected pro­posed fis­cal stim­u­lus, aimed at tar­get­ing job growth and infra­struc­ture spend­ing. Accord­ing to the GS Eco­nom­ics Depart­ment, if imple­mented, the pro­posal would take fis­cal pol­icy from a 1.5 pct  of GDP reduc­tion to a 0.5 pct stim­u­lus. Put together with a clear bias to explore addi­tional ways of mon­e­tary stim­u­lus from the Fed, it is tough for me to see the big down­side risks to the US econ­omy, at least cyclically.

Of course, some­body that had arrived back on earth from a few weeks in Jupiter might ask, “Is this stim­u­lus being pro­posed by the same coun­try that was berat­ing credit rat­ing agen­cies at the start of August for regard­ing its fis­cal stance as not credible?”

I raise this because one of the most inter­est­ing aspects of post Obama mar­ket trad­ing was how unen­thu­si­as­tic the mar­ket response was. Whether this is because investors doubt its effec­tive­ness, doubt the like­li­hood of it being sup­ported by Con­gress, because mar­kets rose in advance on leaks of most of the con­tent, or prob­a­bly, in my view, big­ger neg­a­tive con­cerns else­where, it will no doubt have added to con­cerns of the US con­tin­gent com­ing to Europe for the Mar­seille G7 meeting.

CHINA IS THE STILL THE BIGGEST TRUE HOPE FOR EXCITEMENT.

I had an odd past two days, as I have become more and more con­cerned about aspects of the Euro mess, which I dis­cuss below, but this was more than off­set by excite­ment over a Bloomberg story Thurs­day sug­gest­ing that senior Chi­nese pol­i­cy­mak­ers have been giv­ing out sig­nals that they are now aim­ing for full con­vert­ibil­ity  of the Yuan by 2015.

This is hugely impor­tant, not least as I don’t recall a spe­cific close timetable being cited before. It is unlikely that such a major ini­tia­tive would be unveiled with­out being announced by the lead­er­ship. But accord­ing to some of my con­ver­sa­tions, this notion is cer­tainly not being dis­missed. It fol­lows a grow­ing feel­ing I have had since early August that Bei­jing is def­i­nitely in a mood to accel­er­ate RMB and other reforms. It also comes a few weeks after the French G20 hosts announced that a work­ing group had been estab­lished to develop a plan for RMB inclu­sion in the SDR basket.

I can­not empha­size enough as to how impor­tant, and pos­i­tive, such a devel­op­ment would be. 2015 is not much more than 3 years away. To reach and achieve this goal, a whole host of par­al­lel devel­op­ments would be likely. These would range from less accu­mu­la­tion of FX reserves, steps to develop the Shang­hai stock mar­ket includ­ing the list­ing of many non Chi­nese multi­na­tion­als, and major devel­op­ment of the domes­tic bond mar­ket. It would also move in-step with suc­cess­ful efforts to adjust the economy’s lead­er­ship from exports to domes­tic – con­sump­tion led – demand.

It is no sur­prise to see sto­ries of more cen­tral banks talk­ing about diver­si­fy­ing into the RMB with this week, with both Chile and Nige­ria giv­ing some such sig­nals.
To add to the fla­vor of the open­ing up of the RMB, on Thurs­day, Chi­nese offi­cials issued a joint press release with the UK to announce that Lon­don would be allowed to under­take off­shore RMB trading.

Fri­day brought the impor­tant news that CPI infla­tion in China slowed from 6.5 to 6.2 pct. It is very likely to have peaked for the year, and base effects alone sug­gest a move down to 5 pct or less by early next year. I said to some G7 pol­i­cy­mak­ers I saw in Lon­don yes­ter­day that this is some­thing they should all be embrac­ing instead of berat­ing the Chi­nese about the RMB this week­end. For the mas­sive chal­lenges fac­ing the US and most of Europe, lower infla­tion in China (and other Growth Mar­kets) rep­re­sents the most likely escape from years of weak growth, as it would allow strong increases in per­sonal con­sump­tion to occur.

Fur­ther good news appears to have come this week­end with the August trade data sur­pris­ing on the down­side as a result of stronger imports. I con­tinue to be amazed by the lack of aware­ness of how much the Chi­nese trade bal­ance has improved. This week I appeared at the UK Trea­sury Select Com­mit­tee, along with Ger­ard Lyons  of Stan­dard Char­tered, and the mem­bers seemed to have sim­i­lar views to most I come across. I also par­tic­i­pated as a pan­elist at a Chatham House event on the Global Econ­omy on Fri­day where the new head of the IMF repeated a com­ment I have seen writ­ten by Fund staff that improve­ment in global imbal­ances has stalled. This is sim­ply not true. After the August trade data, we now have 8 months of the 2011 year. And, the 12-month run­ning total trade sur­plus is around $182.7 bn, down from last month and about 2.5 pct of GDP. More­over, the trend of import growth is quite strong. Year to date annu­al­ized they have risen by around $ 350 bn.
So if all of this is such good news, why did Chi­nese equi­ties not rally? I don’t know, but I sus­pect it is because the CPI improve­ment was smaller than hoped for, and with­out an “all clear” regard­ing the infla­tion out­look from the Chi­nese lead­ers, investors are ner­vous about jump­ing the gun. But it cer­tainly seems to me the ingre­di­ents for a big Chi­nese rally are improving.

EUROPE. CAN THE SWISS RUN EMU PLEASE?

What another stag­ger­ing week in Europe. The more it pro­gressed, the more “emer­gency” calls I was asked to join for clients all over the world about the dete­ri­o­rat­ing dynam­ics of Euro­pean Mon­e­tary Union (EMU). Major insti­tu­tional investors, large pri­vate equity firms and big inter­na­tional cor­po­rate were all ask­ing the same under­ly­ing ques­tion, “How can this thing survive?”

Jonathan Bayliss from our Fixed Income team this week led a 2-day onsite off­site about the future for the Euro Area and we will be pro­vid­ing clients with a fla­vor of these dis­cus­sions. Many dif­fer­ent out­side experts were invited to con­tribute. It seems as though “the mud­dle through” path is the one that most see as the most real­is­tic one ahead, with more and more think­ing ulti­mately we get “more Europe” with tighter, clearer fis­cal rules and gen­uine Euro bonds. The depth of mar­ket fragility ques­tions whether time will allow for such a long road There are lots of key event risk fac­tors com­ing up this month, but the vicious cir­cu­lar mood that has taken hold means that, not only does it seem as though some­thing “big” has to hap­pen with Greece pretty soon, but some­thing “big” needs to hap­pen for Euro­pean bank cap­i­tal, the clar­ity and deter­mi­na­tion of ECB pol­icy mak­ing and, most impor­tantly, where Ger­many wants to lead EMU.

I can’t help con­clud­ing that it actu­ally isn’t as dif­fi­cult as many Euro­pean lead­ers seem to think. Bang in the heart of Europe is Switzer­land, and hav­ing seen their com­pet­i­tive­ness poten­tially dev­as­tated by the mess that sur­rounds them, this week the Swiss National Bank (SNB) went ahead and announced the extra­or­di­nary step of putting a for­mal, tem­po­rary floor under the Franc at 1.20 against the Euro. It seemed to me pretty obvi­ous this was com­ing and, within min­utes of the announce­ment, the Franc fell by over 8 pct, which I think has to per­haps be the sin­gle fastest large move of a major cur­rency since float­ing mar­kets com­menced in the 1970’s. I applaud the SNB for such a bold step, and find myself amused at the tons of peo­ple who have sug­gested to me that it won’t work. When a cen­tral bank uses words like “unlim­ited” and puts a new cur­rency arrange­ment at the core of its mon­e­tary pol­i­cy­mak­ing, espe­cially when they are try­ing to turn a grossly mis­aligned cur­rency, my expe­ri­ence sug­gests it should be fol­lowed. Moments such as these in for­eign exchange are all too rare and they are usu­ally the ones that dis­tin­guish cur­rency investors.

When quizzed about the SNB move, pre­dictably, the ECB stated that while they were made aware, it was a solo act of the SNB. While this is obvi­ously the case, the tone of that state­ment sums up for me many of the short­com­ings of Euro Area pol­i­cy­mak­ing. Is it that most of them lives in some kind of time warp? Or is the more sub­tle inter­pre­ta­tion that the key actors know the really pow­er­ful deci­sions need an appear­ance of real cri­sis before the Ger­man elec­torate can be per­suaded to sup­port them?

At least there has been some spec­tac­u­lar Pre­mier League foot­ball espe­cially from a cer­tain team this weekend.

Jim O’Neill

Chair­man, Gold­man Sachs Asset Management

Tags: Bond Auction, Bonds, BRICs, Comic Relief, Decoupling, European Readers, Fiscal Stimulus, Free Ones, Gold, Goldman Bonus, Horse Track, Infrastructure, Kool Aid, Loss Leader, Market Breaks, O Neill, Outlook, Red Knight, Reserve Currency, Risk Markets, Snb, St Legers, Swiss Watch, Us Stock Market
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Michael Pettis: 12 Global Predictions (Long-Term Outlook for China, Europe, and the World)

Thursday, September 1st, 2011

Via email, Michael Pet­tis at China Finan­cial Mar­kets shared his out­look for China, Europe, and the world. The over­all out­look is not pretty, and includes a breakup of the Euro­zone, a major slow­down for China, and a smack-down of the much beloved BRICs.

Pet­tis Writes ...

August is sup­posed to be a slow month, but of course this August has been hec­tic, and a lot cru­eler than April ever was. The US down­grade set off a storm of mar­ket volatil­ity, along with bizarre con­cern in the US about whether or not China will stop buy­ing US debt and the eco­nomic con­se­quence if it does, and equally bizarre blus­ter within China about their refrain­ing from buy­ing more debt until the US reforms the econ­omy and brings down debt levels.

What both sides seem to have in com­mon is an almost breath­tak­ing igno­rance of the global bal­ance of pay­ment mech­a­nisms. China can­not stop buy­ing US debt until it engi­neers a major adjust­ment within its econ­omy, which it is reluc­tant to do. Until it does, any move by the US to cut down its bor­row­ing and spend­ing will trig­ger a drop in global demand which will cause either US unem­ploy­ment to rise, if the US ignores trade issues, or will cause Chi­nese unem­ploy­ment to rise, if the US moves to coun­ter­act Chi­nese cur­rency intervention.

The Big Picture

Rather than try to wade through all the news this month, much of which doesn’t seem to have much infor­ma­tional con­tent, I thought I would duck out alto­gether and instead make a list of things I expect will hap­pen over the next sev­eral years. We are so caught up in noise and mar­ket volatil­ity – as the mar­ket swings first in one direc­tion and then, as reg­u­la­tors react, in the other direc­tion – that it is easy to lose sight of the big­ger picture.

My basic sense is that we are at the end of one of the six or so major glob­al­iza­tion cycles that have occurred in the past two cen­turies. If I am right, this means that there still is a pretty sig­nif­i­cant set of major adjust­ments glob­ally that have to take place before we will have reversed the most impor­tant of the many global debt and pay­ments imbal­ances that have been cre­ated dur­ing the last two decades. These will be dri­ven over­all by a con­trac­tion in global liq­uid­ity, a sharply ris­ing risk pre­mium, sub­stan­tial delever­ag­ing, and a sharp con­trac­tion in inter­na­tional trade and cap­i­tal imbalances.

To sum­ma­rize, my pre­dic­tions are:

1. BRICs and other devel­op­ing coun­tries have not decou­pled in any mean­ing­ful sense, and once the cur­rent liquidity-driven invest­ment boom sub­sides the devel­op­ing world will be hit hard by the global crisis.
2. Over the next two years Chi­nese house­hold con­sump­tion will con­tinue declin­ing as a share of GDP.
3. Chi­nese debt lev­els will con­tinue to rise quickly over the rest of this year and next.
4. Chi­nese growth will begin to slow sharply by 2013–14 and will hit an aver­age of 3% well before the end of the decade.
5. Any decline in GDP growth will dis­pro­por­tion­ately affect invest­ment and so the demand for non-food commodities.
6. If the PBoC resists inter­est rate cuts as infla­tion declines, China may even begin slow­ing in 2012.
7. Much slower growth in China will not lead to social unrest if China mean­ing­fully rebalances.
8. Within three years Bei­jing will be seri­ously exam­in­ing large-scale pri­va­ti­za­tion as part of its adjust­ment policy.
9. Euro­pean pol­i­tics will con­tinue to dete­ri­o­rate rapidly and the major polit­i­cal par­ties will either become increas­ingly rad­i­cal­ized or marginalized.
10. Spain and sev­eral coun­tries, per­haps even Italy (but prob­a­bly not France) will be forced to leave the euro and restruc­ture their debt with sig­nif­i­cant debt forgiveness.
11. Ger­many will stub­bornly (and fool­ishly) refuse to bear its share of the bur­den of the Euro­pean adjust­ment, and the sub­se­quent retal­i­a­tion by the deficit coun­tries will cause Ger­man growth to drop to zero or neg­a­tive for many years.
12. Trade pro­tec­tion sen­ti­ment in the US will rise inex­orably and unem­ploy­ment stays high for a few more years.

1. No BRIC Decoupling

Since most global con­sump­tion comes from the US, Europe and Japan, the col­lapse in their demand will ulti­mately be very painful for the BRICs and the rest of the devel­op­ing world. The lat­ter have post­poned the impact of con­tract­ing con­sump­tion by increas­ing domes­tic invest­ment, in some cases very sharply, but the pur­pose of higher cur­rent invest­ment is to serve higher future con­sump­tion. In many coun­tries, most notably China, the higher invest­ment will itself limit future con­sump­tion growth, and so with weak con­sump­tion growth in the devel­oped world, and no relief from the devel­op­ing world, today’s higher invest­ment will actu­ally exac­er­bate the impact of the cur­rent con­trac­tion in consumption.

2. Near-Term Decline in Chi­nese Consumption

By 2013 Chi­nese house­hold con­sump­tion will still not have exceeded the 35% of Chi­nese GDP reached in 2009. In fact it will prob­a­bly be lower.

Pre­mier Wen listed the need to raise the con­sump­tion share of GDP sec­ond in his speech last March before the unveil­ing of the new Five-Year Plan.

But I remain very, very skep­ti­cal. Low con­sump­tion lev­els are not an acci­den­tal coin­ci­dence. They are fun­da­men­tal to the growth model, and the sup­pres­sion of con­sump­tion is a con­se­quence of the very poli­cies – low wage growth rel­a­tive to pro­duc­tiv­ity growth, an under­val­ued cur­rency and, above all, arti­fi­cially low inter­est rates – that have gen­er­ated the furi­ous GDP growth. You can­not change the for­mer with­out giv­ing up the lat­ter. Until Bei­jing acknowl­edges that it must dra­mat­i­cally trans­form the growth model, which it doesn’t yet seemed to have acknowl­edged, con­sump­tion will con­tinue to be suppressed.

3. Chi­nese Debt Lev­els will Con­tinue to Rise Very Quickly

The attempts to rein in debt growth will fail because they address spe­cific areas of debt and not the over­all ten­dency of the sys­tem to gen­er­ate debt.

China funds almost all of its major invest­ments with bank debt, and it long ago ran out of obvi­ous invest­ments that are eco­nom­i­cally viable – at least invest­ments that are likely to be gen­er­ated by what is a dis­torted sys­tem with very skewed incen­tives – so increases in invest­ment must be matched by increases in debt.

To the extent that invest­ments are not eco­nom­i­cally viable, this means that the value of debt cor­rectly cal­cu­lated must rise faster than the value of assets. By def­i­n­i­tion this results in an unsus­tain­able rise in debt.

4. By 2013–14 Chi­nese GDP Growth will Slow sharply

I don’t expect a sig­nif­i­cant growth slow-down until after the new lead­er­ship takes power in late 2012, but my guess (and hope) is that by 2013 the stub­born refusal of con­sump­tion to rise as share of GDP, and the con­tin­u­ing surge in debt, will have con­vinced all but the most recal­ci­trant that China needs a dra­matic change of policy.

Why do I say we will be talk­ing about 3% growth soon? Two rea­sons. First, I am impressed by the bleak­ness of his­tor­i­cal prece­dents. Every sin­gle case in his­tory that I have been able to find of coun­tries under­go­ing a decade or more of “mir­a­cle” lev­els of growth dri­ven by invest­ment (and there are many) has ended with long peri­ods of extremely low or even neg­a­tive growth – often referred to as “lost decades” – which turned out to be far worse than even the most pes­simistic fore­casts of the few skep­tics that existed dur­ing the boom period. I see no rea­son why China, hav­ing pur­sued the most extreme ver­sion of this growth model, would some­how find itself immune from the con­se­quences that have afflicted every other case.

Sec­ond, I just use a very sim­ple cal­cu­lus. Remem­ber that rebal­anc­ing is not an option for China. It will hap­pen one way or the other, and the sooner the less dis­rup­tive. And for China to rebal­ance in a mean­ing­ful way, con­sump­tion growth is going to have to out­pace GDP growth by at least 3–4 full per­cent­age points (and even then, at that rate, it will take China over five years to return to the 40% that was not long ago con­sid­ered aston­ish­ingly low).

5. Non-Food Com­modi­ties Dis­pro­por­tion­ately Affected

The decline in Chi­nese growth will fall dis­pro­por­tion­ately on invest­ment and, because of this, it will severely impact the price of non-food com­modi­ties. The impli­ca­tions are inescapable, although I think many peo­ple, espe­cially in the com­modi­ties sec­tor, have missed them.

6. Sig­nif­i­cant Slow­ing Could Start in 2012

What hap­pens to real inter­est rates will deter­mine when the process of Chi­nese adjust­ment begins. In fact there is a chance that we may see growth in China slow sig­nif­i­cantly in 2012, per­haps even to 7%, although I sus­pect that it will prob­a­bly be in the 8–9% region.

What the PBoC does to inter­est rates is likely to be the out­come of a strug­gle in the State Coun­cil between pol­i­cy­mak­ers that are wor­ried about growth and those that are wor­ried about imbal­ances. If the PBoC can hold off the for­mer, and espe­cially if wages con­tinue ris­ing, we might begin to see Chi­nese rebal­anc­ing tak­ing place a lit­tle ear­lier than expected. Of course this must, and will, come with much slower GDP growth.

7. Social Unrest Not a Given

Growth rates of 3% will not nec­es­sar­ily lead to social and polit­i­cal insta­bil­ity. Most ana­lysts argue that China needs annual growth rates of at least 8% to main­tain cur­rent lev­els of unem­ploy­ment. Any­thing sub­stan­tially lower will cause unem­ploy­ment to surge, they argue, and this would lead to social chaos and polit­i­cal instability.

I dis­agree. The employ­ment effect of lower growth depends cru­cially on the kind of growth we get. Since rebal­anc­ing in China requires less empha­sis on heavy invest­ment and more on con­sump­tion, and since rebal­anc­ing also means a sharp reduc­tion in free credit pro­vided to SOEs and local gov­ern­ments and cheaper and more avail­able credit for effi­cient but mar­ginal SMEs, a rebal­anc­ing China would pre­sum­ably see much more rapid growth in the ser­vice sec­tor and in the SME sec­tor, both of which are rel­a­tively labor inten­sive. Much lower growth, in that case, could eas­ily come with min­i­mal changes in over­all employ­ment. Japan is a use­ful reminder of what can happen.

8. Large-Scale Privatization

Because of its rapidly ris­ing debt bur­den, the only way for China to man­age a smooth social tran­si­tion will be through wealth trans­fers from the state sec­tor to the house­hold sec­tor. In the past, Chi­nese house­holds received a dimin­ish­ing share of a rapidly grow­ing pie. In the future they must receive a grow­ing share. This will prob­a­bly be accom­plished through for­mal or infor­mal privatization.

9. Dis­rup­tive Euro­pean Politics

Euro­pean pol­i­tics will become much more dif­fi­cult and dis­rup­tive. The his­tor­i­cal prece­dents are clear. Dur­ing a debt cri­sis the polit­i­cal sys­tem becomes frag­mented and con­tentious. If the major par­ties don’t become rad­i­cal­ized, smaller rad­i­cal par­ties will take away their votes.

Remem­ber that the process of adjust­ment is a polit­i­cal one. We all know some­one has to pay for the mas­sive adjust­ment coun­tries like Spain must make. The only inter­est­ing ques­tion is about who will be forced to take the brunt of the pay­ment – work­ers in the form of unem­ploy­ment, the mid­dle classes in the form of con­fis­cated sav­ings, small busi­nesses in the form of taxes, large busi­nesses in the form of taxes and nation­al­iza­tion, for­eign­ers, or creditors.

Decid­ing who pays is a polit­i­cal process, and because the stakes are so high it will be a very bit­ter process. This means, among other things, that pol­i­tics will degen­er­ate quickly, and of course if Europe doesn’t arrive at fis­cal union in the next year or two, it prob­a­bly never will. This con­clu­sion is also the rea­son for my next prediction.

10. Spain, other PIIGS Leave Euro

Spain will leave the euro and will be forced to restruc­ture its debt within three or four years. So will Greece, Por­tu­gal, Ire­land and pos­si­bly even Italy and Belgium.

The only strate­gies by which Spain can regain com­pet­i­tive­ness are either to deflate and force down wages, which will hurt work­ers and small busi­nesses, or to leave the euro and devalue. Given the large share of vote work­ers have, the for­mer strat­egy will not last long. But of course once Spain leaves the euro and deval­ues, its exter­nal debt will soar. Debt restruc­tur­ing and for­give­ness is almost inevitable.

11. Ger­many Will Not Vol­un­tar­ily Share Costs

Unless Ger­many moves quickly to reverse its cur­rent account sur­plus – which is very unlikely – the Euro­pean cri­sis will force a sharp balance-of-trade adjust­ment onto Ger­many, which will cause its econ­omy to slow sharply and even to con­tract. By 2015–16 Ger­man eco­nomic per­for­mance will be much worse than that of France and the UK.

For one or two years the deficit coun­tries will try to bear the full brunt of the adjust­ment while Ger­many scolds and cajoles from the side. Even­tu­ally they will be unable polit­i­cally to accept the nec­es­sary high unem­ploy­ment and they will inter­vene in trade – almost cer­tainly by aban­don­ing the euro and devalu­ing. In that case they auto­mat­i­cally push the brunt of the adjust­ment onto the sur­plus coun­tries, i.e. Ger­many, and Ger­man unem­ploy­ment will rise. I don’t know how soon this will hap­pen, but remem­ber that in global demand con­trac­tions it is the sur­plus coun­tries who always suf­fer the most. I don’t see why this time will be any different.

12. Expect US Ris­ing Trade Pro­tec­tion Sentiment

As the US fights over the fis­cal deficit and whether or not it is the right way to expand domes­tic demand, more and more politi­cians will focus on the expan­sion­ary impact of trade pro­tec­tion. There will be an increas­ing ten­dency to inter­vene in trade – in fact I think of quan­ti­ta­tive eas­ing as a pol­icy aimed at trade and cur­rency imbal­ances as much as one aimed at domes­tic mon­e­tary management.

As unem­ploy­ment per­sists, and as the polit­i­cal pres­sure to address unem­ploy­ment rises, the US will, like Britain in 1930–31, lose its ide­o­log­i­cal com­mit­ment to free trade and become increas­ingly pro­tec­tion­ist. Also like Britain in 1930–31, once it does so the US econ­omy will begin grow­ing more rapidly – thus putting the bur­den of adjust­ment on China, Ger­many (which will already be suf­fer­ing from the Euro­pean adjust­ment) and Japan.

Trade pol­icy in the next few years will be about decid­ing who will bear the brunt of the global con­trac­tion in demand growth. The sur­plus coun­tries, because they are so reliant on sur­pluses, will be very reluc­tant to elim­i­nate their trade inter­ven­tion poli­cies. Because they are mak­ing the same mis­take the US made in the late 1920s and Japan in the late 1980s – think­ing they are in a strong enough posi­tion to dic­tate terms – they will refuse to take the nec­es­sary steps to adjust.

But in fact in this fight over global demand it is the deficit coun­tries that have all the best cards. They con­trol demand, which is the world’s scarcest and most valu­able com­mod­ity. Once they begin inter­ven­ing in trade and regain­ing the full use of their domes­tic demand, they will push the adjust­ment onto the sur­plus coun­tries. Unem­ploy­ment in deficit coun­tries will drop, while it will rise in sur­plus countries.

That is a lengthy clip of ideas, yet hope­fully within the spirit of Pet­tis' guide­lines on these emails. His PDF is 14 pages and will appear on his blog shortly.

I added the bold head­lines in the detailed dis­cus­sion points above.

Six Key Ideas

1. China Will Slow Much More than China Bulls and Com­mod­ity Bulls Think
2. Non-food Com­modi­ties Take Big Hit
3. Euro­zone Exper­i­ment Ends in Breakup
4. US Pro­tec­tion­ism Takes Hold
5. Deficit Coun­tries Con­trol Demand, Thus Have the Best Cards
6. Dis­as­ter Hits BRICs

Con­trar­ian Thinking

Except per­haps for points three and four (and per­haps for all six points) investors and ana­lysts have taken the oppo­site view. Most are look­ing to buy the dip, invest in com­modi­ties, invest in com­mod­ity pro­duc­ing cur­ren­cies, and invest in the BRICs.

We did not have com­mod­ity pro­ducer decou­pling in 2008 and there is no rea­son to expect it as debt-deflation plays out and China aban­dons its reck­less invest­ments in infrastructure.

I sus­pect China slows sooner than Pet­tis thinks, but no sooner than the next régime change in China. Mar­kets, how­ever, may react well in advance.

Global Defla­tion­ary Outlook

Pet­tis does not use the word "defla­tion" in his writeup, but he describes a very defla­tion­ary global out­look com­plete with pro­tec­tion­ism, beggar-thy-neighbor poli­cies, cur­rency wars, and falling non-food com­mod­ity prices.

Pet­tis did not dis­cuss energy, but the forces are clear: peak oil. vs. global slow­down. Given peak oil and the pos­si­bil­ity of war over it, energy is a wildcard.

What Coun­try Leaves Euro­zone First?

The cur­rent polit­i­cal path includ­ing the dis­missal of Eurobonds by Ger­many and France cer­tainly indi­cates a breakup of the Euro­zone. How­ever, I won­der if Ger­many aban­dons the Euro first, rather than one of the PIIGS.

I doubt it mat­ters much, at least from the per­spec­tive of Ger­many. How­ever, should Ger­many leave the Euro, France would then be in the posi­tion Ger­many is in now, cer­tainly unable to bailout the rest of the Eurozone.

One way or another, the grand exper­i­ment will fail. His­tor­i­cally speak­ing it never had a chance. There has never been a suc­cess­ful cur­rency union in his­tory that did not also include a fis­cal union.

The ques­tion at hand is how much more will gov­ern­ments force down the throats of tax­pay­ers (hop­ing to bail out the banks and the bond­hold­ers) before this mess cracks in pieces. The more politi­cians force down tax­payer throats, the big­ger the even­tual repercussions.

Shrink to Survive

Just as I typed the above thoughts a Bloomberg head­line came in on this very sub­ject: Prospect of New Core Euro Gains Traction

The euro area may need to shrink to survive.

As its sovereign-debt cri­sis nears a third year and res­cue efforts fail to stop the rot in finan­cial mar­kets, econ­o­mists from Pacific Invest­ment Man­age­ment Co.’s Mohamed El-Erian to Harvard’s Mar­tin Feld­stein say ensur­ing the euro’s exis­tence may require mem­bers to leave the 17-nation cur­rency region.

The result would be what El-Erian, Pimco’s New­port Beach, California-based chief exec­u­tive offi­cer, calls a “smaller, much bet­ter inte­grated, fis­cally strong euro zone.” While lead­ers such as Ger­man Chan­cel­lor Angela Merkel con­sis­tently rule out that option, El-Erian told “Bloomberg Sur­veil­lance” with Tom Keene on Aug. 17 that they even­tu­ally may embrace it over the fis­cal union required to main­tain the sta­tus quo.

Don' expect ratio­nal think­ing from EU lead­ers. Instead, expect politi­cians to act in their per­ceived best inter­ests and sec­on­dar­ily in the per­ceived bests inter­ests of the banks and bondholders.

All it takes is for any coun­try to leave, even Greece, before other coun­tries con­sider the same thing.

There are lots of ideas in this post to con­sider, and I thank Michael Pet­tis for shar­ing his thoughts.

Adden­dum:

Reader Craig writes: "I was shocked by your com­men­tary on 12. I thought for sure you would come out blast­ing U.S. trade restric­tions as pro­tec­tion­ist and lead­ing to eco­nomic slow­down in the U.S. Instead, you basi­cally said what Trump has been say­ing in every inter­view, and that is that China is play­ing us for fools and that we need to recap­ture our man­u­fac­tur­ing from them. I thought you were a "free trader" to the max."

Craig, I am indeed a free trade advo­cate and I cer­tainly do not agree with Don­ald Trump and other pro­tec­tion­ists such as Paul Krug­man. I sim­ply failed to point out every nuance in the arti­cle I dis­agree with. It is a mis­take to assume I agree with "every­thing" in an arti­cle just because I agree with 90% of it. I made no spe­cific com­ments on pro­tec­tion­ism so there should not have been an impli­ca­tion of agreement.

I do not think the US gains by pro­tec­tion­ism. Other coun­tries will do the same and US exports will dive if imports dive as other coun­tries retal­i­ate. There is seri­ous poten­tial for another Smoot-Hawley with equally dev­as­tat­ing con­se­quences if Con­gress goes overboard.

Where I did com­ment and where I agree with Pet­tis' con­trar­ian think­ing is that the brunt of the adjust­ment will be felt on trade sur­plus coun­tries. Math­e­mat­i­cally it has to, in any kind of rebal­anc­ing. Not every coun­try can run a trade sur­plus. It is impossible.

More­over, and as Pet­tis points out, the imposed aus­ter­ity mea­sures in Europe will impact Germany's abil­ity to export. The slow­down in China and the US will also impact Germany.

The ques­tion is whether or not adjust­ments come about in a rea­son­able man­ner or by trade wars and cur­rency deval­u­a­tions. No one wins in another Smoot-Hawley setup.

I have pointed out what I believe is the solu­tion on many occa­sions. Rather than tar­iffs I have sup­ported a return to the gold stan­dard. I saw no need to bring it up yet again, but per­haps I should have.

Here are the per­ti­nent links once again.

Hugo Sali­nas Price and Michael Pet­tis on the Trade Imbal­ance Dilemma; Gold's Hon­est Dis­ci­pline Revisited

Michael Pet­tis Warns of "Vir­u­lent Polit­i­cal Turn Against Euro", Adds Clar­i­fi­ca­tion to "Gold's Hon­est Discipline"

To that I would add we des­per­ately need to get rid of frac­tional reserve lending.

I also want to add a note that peak oil (some say "peak every­thing") will impact China's abil­ity to have an invest­ment led econ­omy based for­ever expand­ing infra­struc­ture. Add peak oil to the list of rea­sons China will slow, whether they like it or not.

Mike "Mish" Shed­lock
http://globaleconomicanalysis.blogspot.com

Tags: Balance Of Payment, Bluster, Bonds, BRICs, Chinese Currency, Commodities, Crueler, Currency Intervention, Debt Levels, Economic Consequence, Eurozone, Financial Markets, Global Balance, Global Demand, Global Predictions, Gold, Informational Content, Infrastructure, Market Swings, Market Volatility, Michael Pettis, Outlook, Payment Mechanisms, Slowdown, Term Outlook
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Gangs of New York (Saut)

Monday, April 18th, 2011

Gangs of New York

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

April 18, 2011

“The appear­ance of law must be upheld, espe­cially when it’s being broken”

... Boss Tweed, Gangs of New York

I love New York City! In fact, I wish I would have stayed there rather than mov­ing to Atlanta in the early 1970s. Still, as I walked from the air­plane into the ter­mi­nal last Mon­day, I got the feel­ing I was trav­el­ing back in time since La Guardia is in need of a “refresh.” Pro­ceed­ing to the taxi stand was like­wise anachro­nis­tic as cer­tain parts of my taxi were being held together with duck tape. Be that as it may, the trek into “the city” began. Dur­ing the jour­ney I pre­ceded over pot­holed streets, decay­ing bridges, a tun­nel that reminded me of my youth, and dead-zones that dropped numer­ous phone calls beg­ging the ques­tion – What hap­pened to those promised “shovel-ready” projects?! All in all, I felt like I was in a third-world coun­try, not the great­est city in the world. Con­trast that expe­ri­ence with Singapore’s Changi Air­port. One arrives at arguably the best air­port in the world, with over 80 air­lines serv­ing more than 180 cities. Despite the fact the air­port has been open since 1981, it remains a bench­mark for ser­vice excel­lence hav­ing won over 280 awards. Travel to and from the air­port is mod­ern and effi­cient, both by road and rail. Indeed, there are no pot­holed roads, no old taxis, no decrepit trains, no “dropped” phone calls ... well, you get the idea.

Nonethe­less, last Mon­day began with vis­its to a cou­ple of hedge funds. At noon I arrived at Yahoo’s new TV stu­dio to do a seg­ment on “Break­out” with my friends Jeff Macke and Matt Nesto. From there, it was off to see some port­fo­lio man­agers (PMs) before the next media “hit” at Fox Busi­ness with another friend, Brian Sul­li­van. While I am kin­dred spir­its with these media anchors, by far the high­light of last Mon­day was din­ner with Pres­i­dent Bill Clinton.

The Pres­i­dent opined, “I like liv­ing in the 21st cen­tury.” He talked about tech­no­log­i­cal break­throughs like those from the TRIUMF Cyclotron, which may offer clues on how “mat­ter” holds together. He also was pretty excited about genome research since it is offer­ing insights on health­care issues, and, poten­tially, ways to pre­vent seri­ous ill­nesses. Cli­mate issues were on his mind, along with water and top­soil (if that sounds famil­iar, it should since I have been talk­ing, and invest­ing, in those themes for decades). In fact, the Pres­i­dent actu­ally com­mented, “Only two coun­tries in the world have 20 feet of top­soil remain­ing – Brazil and Argentina.” From there the topic shifted to the U.S. and the var­i­ous “sys­tems” that make our coun­try what it is (law, courts, gov­ern­ment, food, shel­ter, edu­ca­tion, etc.). The Pres­i­dent sug­gested those sys­tems have become prob­lem­atic because our lead­ers want to hold on to their power; there­fore, they don’t want the “sys­tems” to change. Yet sys­tems need to evolve to stay great, just as great com­pa­nies stay great by evolv­ing into becom­ing young again. He con­tin­ued, “You need a strong econ­omy to empower change; and there is too lit­tle dis­cus­sion on how we pro­pose to do that given the country’s bud­getary con­straints.” He con­cluded with the ques­tion, “How do you pro­pose to do what­ever you are talk­ing about?!”

Next, he focused on the world. To wit, “Unless we find a way to ame­lio­rate the world’s ‘poor peo­ple,’ it is going to affect our coun­try.” “There is too much inequal­ity in the world,” he said, “with half of the world’s pop­u­la­tion liv­ing on less than $2 per day.” More­over, the world’s pop­u­la­tion is grow­ing faster than the abil­ity to deal with that growth. Hereto, feed­ing that grow­ing pop­u­la­tion is another theme we have harped on for years. The Pres­i­dent believes that the sys­tems of wealthy coun­tries need to be built in the world’s “poor places” to effect eco­nomic change. He also stated, “Giv­ing woman access to jobs has always low­ered the birth rate because it delays mar­riage.” This, he thinks, would help slow the bur­geon­ing pop­u­la­tion growth. All said, he was upbeat about the world’s prospects, believ­ing the pos­i­tives ver­sus the neg­a­tives cur­rently net out to the pos­i­tive side of the equa­tion. “To be sure,” he main­tained, “a cer­tain amount of insta­bil­ity is a good thing because it fos­ters cre­ativ­ity, but too much uncer­tainty is a bad thing.”

The Pres­i­dent closed by not­ing, “The cur­rent bud­get debate is really a food fight beg­ging the ques­tion – what type of coun­try do you want?” Man­i­festly, peo­ple have to believe that they can shape their own future; and on that point, the envi­ron­ment is ques­tion­able. He avers we have two Amer­i­cas liv­ing in a par­al­lel uni­verse with polit­i­cal views being argued abun­dantly about the nation’s issues rather than the facts. His “call to arms” – “Many of you are in a posi­tion to answer the HOW ques­tion; and, the world man­i­festly needs you to answer that question!”

After reflect­ing on the for­mer President’s words overnight, I spent a few hours Tues­day morn­ing lis­ten­ing to Gold­man Sachs Asset Management’s (GSAM) Jim O’Neill, who coined the acronym BRIC (Brazil, Rus­sia, India, and China) some six years ago. Over that time­frame the BRIC’s equity mar­kets have returned a stun­ning 817%. Recently, Jim has invented another acronym, the “Next 11” or N-11 (Bangladesh, Egypt, Indone­sia, Iran, Mex­ico, Nige­ria, Pak­istan, Philip­pines, South Korea, and Viet­nam), which GSAM believes have the poten­tial, com­bined with the BRICs, to become the world’s largest economies in the 21st cen­tury. Obvi­ously, that strat­egy “foots” with me since I have been talk­ing about it ever since China joined the World Trade Orga­ni­za­tion in 1Q01. Impor­tantly, Jim thinks, and I agree, that the BRICs and N-11 coun­tries will be able to com­pen­sate for any slug­gish­ness in the U.S. Addi­tion­ally, Jim hinted that China has engi­neered a “soft land­ing,” although he does think China’s growth may dis­ap­point this year because its gov­ern­ment wants to slow the econ­omy to pro­vide more solid, long-term, growth. These are not unim­por­tant points, for Jim O’Neil’s com­ments, when com­bined with Pres­i­dent Clinton’s, have formed many of the strate­gies we have employed to “bend” port­fo­lios over the past 10 years. We con­tinue to embrace these themes and advise tilt­ing port­fo­lios accordingly.

The bal­ance of last week was spent doing more media, con­vers­ing with my New York-based “gang” and see­ing var­i­ous money man­age­ment “gangs.” In such meet­ings, after a brief top-down overview of the econ­omy, inter­est rates, infla­tion, the equity mar­kets, etc., the con­ver­sa­tion turned toward indi­vid­ual stocks. At a num­ber of accounts it was inter­est­ing to find that Williams Com­pa­nies (WMB/$31.05/Outperform), a name we have con­tin­u­ously rec­om­mended, was heav­ily owned by the insti­tu­tions we were see­ing. It will also be inter­est­ing to see what hap­pens when Williams’ offer­ing doc­u­ments, dis­cussing that company’s pend­ing spin­off, are released, giv­ing investors the abil­ity to value the embed­ded “options” within the two com­pa­nies. Our sense is said doc­u­ments will per­mit par­tic­i­pants to more accu­rately value those “options” with an atten­dant “hop” in WMB’s share price. We also got trac­tion with the Utica Shale Gas story, and its pos­i­tive impact for 5.4% yield­ing EV Energy Part­ners (EVEP/$54.56/Outperform) given the poten­tially under­val­ued embed­ded “option” of EVEP’s 230,000 acres in that Utica resource.

Two other ideas we dis­cussed with PMs last week, con­cur­rent with the recent rota­tion into health­care, were Covi­dien (COV/$53.80/Strong Buy) and Hos­pira. Covidien’s story has these dri­vers: 1) a shift­ing busi­ness mix toward higher mar­gin med-devices (vas­cu­lar prod­ucts in par­tic­u­lar); 2) recent FDA approval for “Pipeline Emboliza­tion Device” (PED) for treat­ment of brain aneurisms with approval com­ing two months early, pro­vid­ing upside to FY2012 num­bers; and, giv­ing us expec­ta­tions of accel­er­at­ing rev­enue growth and mar­gin expan­sion. As for Hos­pira (HSP/$56.00/Outperform), it is a spe­cialty generic pharma and med­ical device com­pany. The macro story includes an industry-wide shift to generic drugs, an approval of Tax­otere (breast/prostate can­cer drug) two weeks ear­lier than expected, and the belief that “biosim­i­lars” (like gener­ics, but not exact chem­i­cal copies) will be as accepted here as they are in Europe. That com­bi­na­tion leaves HSP trad­ing at 13x 2012 esti­mates, in line with its peers, but below its his­tor­i­cal aver­age of ~14.5x. We expect mid single-digit rev­enue growth, yet mid-teens EPS growth, which leaves the shares undervalued.

The call for this week: I began this mis­sive with a quote from the movie “Gangs of New York” that reads, “The appear­ance of law must be upheld, espe­cially when it’s being bro­ken.” I recalled that quip sparked by a remark from a par­tic­u­larly bright fel­low last week who opined, “Only when the Amer­i­can peo­ple insist that sound busi­ness prac­tices, and moral stan­dards, be brought back will we be able to give the peo­ple of this coun­try a future.” Unfor­tu­nately, as Pres­i­dent Clin­ton averred at the U.N., “Polit­i­cal views (are) being argued about the nation’s issues rather than the facts.” The result seems to have left our gov­ern­ment in stale­mate mode. Sim­i­larly, the equity mar­kets seem to be in stale­mate mode recently as since the Feb­ru­ary 18th peak there has been not much desire to either Buy or Sell. This is con­firmed by the Lowry’s orga­ni­za­tion, whose Buy­ing Power Index has dropped by a mere 42 points, while Lowry’s Sell­ing Pres­sure Index has risen by a pal­try 16 points! To us, all the equity mar­ket appears to be doing is recharg­ing its inter­nal energy to gar­ner enough power to burst above the Feb­ru­ary 18, 2011, intra­day high of 1344. Last week was just another step in that direc­tion for when the S&P 500 (SPX/1319.68) vio­lated the 1320 – 1325 trad­ing “fail safe” zone, it quickly traded down to ~1303, which was the 38.2% retrace­ment of the recent rally men­tioned in last Monday’s let­ter, before ral­ly­ing into Friday’s close. All of which brings us to this week where we sense the weak­ness is likely to linger into mid-week before the inter­nal energy is fully recharged for another leg to the upside.

Copy­right © Ray­mond James

Tags: Begging The Question, Boss Tweed, Brazil, Brian Sullivan, BRIC, BRICs, Changi Airport, Chief Investment Strategist, Duck Tape, Friend Brian, Gangs Of New York, Gold, India, Jeff Macke, jeffrey saut, Kindred Spirits, Last Monday, Portfolio Managers, Potholed Streets, President Bill Clinton, Ready Projects, Service Excellence, Taxi Stand, Third World Country, Traveling Back In Time
Posted in Brazil, Emerging Markets, Energy & Natural Resources, Gold, India, Markets, Oil and Gas | Comments Off

High Gasoline Prices Are Costing U.S. Consumers $360 Million More A Day At The Pump

Friday, April 15th, 2011

by Bob Van Der Valk, via Econ­Mat­ters

This year is an instant replay of 2008 with the aver­age price of reg­u­lar gaso­line in the US expected to reach $4 per gal­lon in the next month. Cal­i­for­ni­ans have already sur­passed that mark and are head­ing for $4.50 per gal­lon by Memo­r­ial Day.

On Mon­day, April 11, Jef­frey Cur­rie, the global head of com­modi­ties at Gold­man Sachs (GS), told his clients that ris­ing demand from emerg­ing mar­ket play­ers ear­lier this year had been over­taken by a sup­ply shock dri­ven by the MENA (Mid­dle East and North Africa) unrest.

Cur­rie said,

"That has had the effect of intro­duc­ing more down­side risk into the trade, par­tic­u­larly given record lev­els of spec­u­la­tive longs (trad­ing) in crude,"

In other words, he advised them to sell – sell — sell WTI (West Texas Intermediate) crude oil and investors, like lem­mings, fol­lowed him off the cliff. The WTI crude oil price reacted by imme­di­ately drop­ping almost $6 a bar­rel, or 5.8%, in two days.

How­ever, the price of crude oil is not based purely on sup­ply and demand and has a spec­u­la­tive ele­ment built into it, which is once again being heav­ily influ­enced by money flows from the big hedge funds such as Gold­man Sachs (GS) and Mor­gan Stan­ley (MS). In other words, Jef­frey Cur­rie pulled a head fake and his investors have been will­ing to go along with him.

Lloyd Blank­fein, the CEO of GS, made his now infa­mous remark to the Sun­day Times of Lon­don on Novem­ber 8, 2009, say­ing: “Invest­ment bankers are just doing God's work”.

Today the MENA unrest has caused increases in crude oil prices and invest­ment banks are tak­ing advan­tage of the oppor­tu­nity to make huge prof­its.  In any other times, this would have been called war prof­i­teer­ing, but now it is con­sid­ered busi­ness as usual with Gor­don Gekko’s motto “greed is good” back in vogue.

WTI is being used as the short leg of a spread involv­ing funds play­ing off the MENA unrest. Investors are going long on Brent and short­ing WTI then mov­ing in and out of that spread when­ever eco­nomic data is released in the US.

The chart below indi­cates we now have a sig­nif­i­cant dis­con­nect between WTI and Brent futures in recent months. The black line shows the New York Mer­can­tile Exchange (NYMEX) WTI and the red line shows the ICE Brent front month futures with the green line show­ing the basis (dif­fer­ence) between the two:


Chart Source — Mer­ca­tus Energy Advisors

Brent has thereby become more indica­tive of the world crude oil price and the price direc­tion for U.S. gaso­line prices.

The fol­low­ing chart pro­duced by Doug Short shows the dif­fer­en­tial between WTI crude oil and the aver­age price of gaso­line for the last 10 years:

There are good rea­sons for the WTI prices to take a big plunge in the next few weeks with crude oil inven­to­ries at Cush­ing at an all time high. The direct con­nec­tion to sup­ply and demand was lost after paper traders took over man­ag­ing those inven­to­ries at the Cush­ing, Okla­homa hub.

On Wednes­day, April 13, the bench­mark WTI crude oil price closed up 86 cents at $107.11 a bar­rel on the NYMEX after drop­ping 3.3% on Tues­day. The Brent crude oil for May deliv­ery also went up to near $123 a bar­rel on Inter­con­ti­nen­tal Exchange (ICE) in London.

Gold­man Sachs (GS) has enough investors fol­low­ing their advice to be able to con­trol the ups and down of crude oil.  Mean­while, the Orga­ni­za­tion of Petro­leum Export­ing Coun­tries (OPEC) said higher prices have begun to chip away at fuel con­sump­tion, but did not call for an emer­gency meet­ing to address the situation.

Pres­i­dent Obama could soon make another call for a wind­fall prof­its tax on major oil com­pa­nies, which could bring in nearly a bil­lion dol­lars a day for the US Trea­sury. He called for just such a tax dur­ing his cam­paign in 2008 at the height of the last spec­u­la­tive run up in gaso­line prices.

In the end, the addi­tional cost of crude oil comes out of the con­sumers pock­ets.  The high gaso­line prices are cost­ing the U.S. con­sumers $360 mil­lion per day more ver­sus the price paid last year at the pump.

Related Read­ing — Oil Price Inflated, Time to Take Prof­its From Resource Related Investments

About The Author — Bob van der Valk lives in Terry, Mon­tana and is a Petro­leum Indus­try Ana­lyst with over 50 years of expe­ri­ence in the petro­leum, gaso­line and lubri­cants indus­try.  He has often been quoted by news media and his opin­ions are also solicited by gov­ern­ment enti­ties in addi­tion to his daily busi­ness of man­ag­ing large scale sup­ply and mar­ket­ing operations.

The views and opin­ions expressed herein are the author's own and do not nec­es­sar­ily reflect those of Econ­Mat­ters.

Tags: BRIC, BRICs, Commodities, Crude Oil, Crude Oil Price, Crude Oil Prices, Downside Risk, Gasoline Prices, Global Head, Gold, Goldman Sachs, Gordon Gekko, Instant Replay, Investment Banks, Money Flows, Morgan Stanley, oil, Price Of Crude Oil, Sachs Gs, Short Leg, Sunday Times Of London, Supply Shock, Times Of London, Van Der Valk, Wti Crude Oil, Wti Crude Oil Price
Posted in Commodities, Emerging Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off

Charles Plosser and the 50% Contraction in the Fed's Balance Sheet (Hussman)

Sunday, April 10th, 2011

by John Huss­man, Huss­man Funds

Last week, an unusual event hap­pened in the money mar­kets that should not escape the atten­tion of investors. The yield on 3-month Trea­sury bills plunged to less than 5 basis points. As I noted this past Jan­u­ary in Six­teen Cents: Push­ing the Unsta­ble Lim­its of Mon­e­tary Pol­icy , a col­lapse in short-term yields to nearly zero is a pre­dictable out­come of QE2, based on the very robust his­tor­i­cal rela­tion­ship between short-term inter­est rates and the amount of cash and bank reserves (mon­e­tary base) that peo­ple are will­ing to hold per dol­lar of nom­i­nal GDP:

"Bar­ring exter­nal upward pres­sures on inter­est rates, a fur­ther non-inflationary expan­sion of the Fed's bal­ance sheet of $400 bil­lion, to $2.4 tril­lion (as con­tem­plated under QE2), would imply the need for 3-month Trea­sury yields to fall to just 0.05%. Higher rates would be infla­tion­ary, because mon­e­tary veloc­ity would not be suf­fi­ciently restrained. In effect, a fur­ther expan­sion in the mon­e­tary base requires that short-term inter­est rates decline enough to ensure a sig­nif­i­cant drop in velocity.

"In terms of liq­uid­ity pref­er­ence, a com­ple­tion of QE2 requires liq­uid­ity pref­er­ence to increase to 16 cents per dol­lar of nom­i­nal GDP — eas­ily the high­est level in his­tory. We hit 15 cents at the peak of the credit cri­sis. To get past that, short-term inter­est rates will have to decline to the point where there is no com­pe­ti­tion from inter­est rates at all, but where the slight­est amount of inter­est rate pres­sure would either drive infla­tion higher or force a mas­sive con­trac­tion in the Fed's bal­ance sheet to avoid that out­come. Then what?"

On fur­ther review, that "16 cents" fig­ure actu­ally under­es­ti­mates how extreme the sit­u­a­tion will be within a few weeks. The mon­e­tary base has already sur­passed $2.4 tril­lion. Indeed, as of Wednes­day, the U.S. mon­e­tary base stood at $2.49 tril­lion. QE2, as presently con­tem­plated, will actu­ally bring the U.S. mon­e­tary base to over $2.6 tril­lion. As the Fed notes in its report Domes­tic Open Mar­ket Oper­a­tions dur­ing 2010 ,

" With progress towards its statu­tory objec­tives of max­i­mum employ­ment and price sta­bil­ity dis­ap­point­ingly slow in the fall of 2010, most Com­mit­tee mem­bers judged it appro­pri­ate to pro­vide addi­tional mon­e­tary accom­mo­da­tion. Accord­ingly, the FOMC announced at its Novem­ber meet­ing that it intended to increase the total face value of domes­tic secu­ri­ties in the SOMA port­fo­lio to approx­i­mately $2.6 tril­lion by the end of June 2011 by pur­chas­ing a fur­ther $600 bil­lion of longer term Trea­sury secu­ri­ties in addi­tion to any amounts asso­ci­ated with the rein­vest­ment of prin­ci­pal pay­ments on agency debt and MBS."

With nom­i­nal GDP at about $15 tril­lion, the U.S. econ­omy will then have to hold well over 17 cents of base money per dol­lar of GDP. This would be by far the largest fig­ure in his­tory. In order to pre­vent infla­tion­ary impact from this level of mon­e­tary base (that is, to pre­vent base money from becom­ing a "hot potato" that nobody is will­ing to hold), we esti­mate that 3-month Trea­sury bill yields will have to be sus­tained no higher than a few basis points until the Fed reverses course.

[Geeks Note: The inter­est rate esti­mates are based on the inverse of the liq­uid­ity pref­er­ence func­tion, which explains 96% of the his­tor­i­cal vari­a­tion in money hold­ings as a frac­tion of nom­i­nal GDP. The dynamic equa­tion is i = exp(4.25 — 129.87*M/PY + 84.42*M/PY_lagged_6_mos). This has the steady-state of i = exp(4.27 – 45.5*M/PY). See the orig­i­nal "Six­teen Cents" piece for fur­ther details].

Track­ing QE2

Mar­ket par­tic­i­pants widely assume that they are rel­a­tively "safe" to take spec­u­la­tive risk through mid-year, on the belief that the Fed's pol­icy of quan­ti­ta­tive eas­ing will be sus­tained through the end of June. But look­ing at the mon­e­tary data, it is not clear that the Fed's state­ment "by the end of the sec­ond quar­ter" means "pre­cisely until the end of the sec­ond quarter."

We can eval­u­ate the pace of QE2 in two ways. One is by look­ing directly at the mon­e­tary base. QE2 trans­ac­tions expand the Fed's bal­ance sheet, increas­ing its assets (Trea­sury debt) and simul­ta­ne­ously increas­ing its lia­bil­i­ties (cur­rency and bank reserves). So we can mea­sure the progress of QE2 by cal­cu­lat­ing the change in the mon­e­tary base since QE2 was initiated.

Mon­e­tary Base 11/03/10: $1985.1 bil­lion
Mon­e­tary Base 04/06/11: $2490.3 bil­lion
QE2 com­pleted based on change in Mon­e­tary Base: $505.2 billion

A sec­ond way to eval­u­ate the pace of QE2 is to go directly to the infor­ma­tion on "per­ma­nent open mar­ket oper­a­tions" (POMO) con­ducted by the Fed­eral Reserve Bank of New York. How­ever, the POMO fig­ures also include rein­vest­ment of prin­ci­pal repay­ments from mortgage-backed secu­ri­ties. So a por­tion of these trans­ac­tions do not change the mon­e­tary base — they sim­ply exchange mortgage-backed assets with Trea­sury secu­ri­ties. The cumu­la­tive par amount accepted by NY FRB from 11/04/10 through 04/07/11 is $523.2 billion

A $600 bil­lion addi­tion to the mon­e­tary base from QE2 would leave the Fed with only about $94.8 bil­lion of QE2 trans­ac­tions remain­ing. Alter­na­tively, the tar­geted size of the Fed's SOMA (Sys­tem Open Mar­ket Account) port­fo­lio is $2600 bil­lion at the end of QE2 (this is the pri­mary repos­i­tory of assets back­ing the mon­e­tary base, the remain­der rep­re­sent­ing the Maiden Lane port­fo­lios and about $11 bil­lion in gold). As of April 6, the SOMA port­fo­lio was already at $2421 bil­lion. This would leave a larger $179 bil­lion remain­ing to QE2, putting the pro­gram about 70% com­plete. The aver­age pace of Fed pur­chases since Feb­ru­ary has been about $5.5 bil­lion per busi­ness day, with about $4.7 bil­lion adding to the mon­e­tary base, on aver­age (the rest rep­re­sent­ing mort­gage prin­ci­pal rein­vest­ments). That leaves QE2 some­where between 20 to 38 busi­ness days from completion.

The next FOMC meet­ing is on April 26–27. While there has been some debate on whether the Fed might decide at that meet­ing to ter­mi­nate the pol­icy of QE2 early, that debate is actu­ally moot. By the time the Fed meets later this month, QE2 will already be at least 85% complete.

As a side note, I've seen a com­ment from a num­ber of ana­lysts lately, along the lines of "there's been an 80% cor­re­la­tion between the size of the mon­e­tary base and the level of the S&P 500 since early 2009." This is just poor sta­tis­tics. There's lit­tle doubt that the two have been related, but the seem­ingly impres­sive strength of the cor­re­la­tion is com­pletely an arti­fact of the shared upward slope. If you take any two series with gen­er­ally diag­o­nal trends and lit­tle cycli­cal fluc­tu­a­tion, you'll always get a "strong" cor­re­la­tion. That's not to say that the mar­ket has not been sub­stan­tially dri­ven by Fed pol­icy, but rather to warn against care­less sta­tis­ti­cal rea­son­ing more gen­er­ally. I guar­an­tee that there's also a 80%+ cor­re­la­tion between the height of a baby kan­ga­roo in Mel­bourne and the cumu­la­tive num­ber of eggs laid by a hen in Okla­homa since early 2009.

Charles Plosser and the 50% con­trac­tion of the Fed's bal­ance sheet

A week ago, Charles Plosser, the head of Philadel­pha Fed­eral Reserve Bank, argued that the Fed should increase short-term inter­est rates to 2.5% "start­ing in the not-too-distant-future," prefer­ably dur­ing the com­ing year. Given the robust his­tor­i­cal rela­tion­ship between short-term yields and the amount base money per dol­lar of nom­i­nal GDP, we can make a fairly tight esti­mate of how much the Fed would have to con­tract the mon­e­tary base in order to achieve a 2.5% yield with­out pro­vok­ing infla­tion­ary pres­sures. While the mon­e­tary base will be over $2.5 tril­lion by the end of this month, a 2.5% inter­est rate would require a con­trac­tion of about $1.3 tril­lion in the Fed's bal­ance sheet, to a smaller mon­e­tary base of just under $1.2 trillion.

In his com­ments, Plosser dis­cussed a plan to sell about $125 bil­lion in Fed hold­ings for every 0.25% increase in the Fed Funds rate. That over­all esti­mate is just about right (ten incre­ments of 0.25 each, with an over­all con­trac­tion approach­ing $1.3 tril­lion in the Fed's bal­ance sheet). So Plosser's esti­mates cor­rectly imply that a 2.5% non-inflationary inter­est rate tar­get would require the Fed's bal­ance sheet to con­tract by more than 50%.

The prob­lem, how­ever, is that the required shift in the mon­e­tary base is not lin­ear. It's heav­ily front-loaded. Based on the his­tor­i­cal liq­uid­ity pref­er­ence rela­tion­ship (which explains about 96% of the vari­a­tion in his­tor­i­cal data), and assum­ing nom­i­nal GDP of $15 tril­lion, the fol­low­ing are lev­els of the mon­e­tary base con­sis­tent with a non-inflationary increase in short-term inter­est rates up to 2.5%. The non-inflationary pro­vi­sion is impor­tant. You can't just allow inter­est rates to rise with­out con­tract­ing the mon­e­tary base. Oth­er­wise, as noted ear­lier, non-interest bear­ing money would quickly become a hot potato and infla­tion would pre­dictably follow:

Trea­sury bill yields and mon­e­tary base con­sis­tent with price sta­bil­ity
0.04%: $2.56 tril­lion
0.25%: $1.92 tril­lion
0.50%: $1.68 tril­lion
0.75%: $1.54 tril­lion
1.00%: $1.44 tril­lion
1.25%: $1.36 tril­lion
1.50%: $1.30 tril­lion
1.75%: $1.24 tril­lion
2.00%: $1.20 tril­lion
2.25%: $1.16 tril­lion
2.50%: $1.12 trillion

The upshot is that Plosser's esti­mate of about $125 bil­lion in asset sales for every 0.25% increase in yields is an accu­rate over­all aver­age, but the pro­file of required asset sales is enor­mously front-loaded. The first hike will be, by far, the most dif­fi­cult. In order to achieve a non-inflationary increase in yields even to 0.25%, the Fed will have to reverse the entire amount of asset pur­chases it has engaged in under QE2. Indeed, the last time we observed Trea­sury bill yields at 0.25%, the mon­e­tary base was well under $2 trillion.

In my view, this is a major prob­lem for the Fed, but is the inevitable result of push­ing mon­e­tary pol­icy to what I've called its "unsta­ble lim­its." High lev­els of mon­e­tary base, per dol­lar of nom­i­nal GDP, require extremely low inter­est rates in order to avoid infla­tion. Con­versely, rais­ing inter­est rates any­where above zero requires a mas­sive con­trac­tion in the mon­e­tary base in order to avoid infla­tion. Ben Bernanke has left the Fed with no grace­ful way to exit the situation.

As a side note, it's prob­a­bly worth not­ing that the Fed­eral Reserve has already pushed its bal­ance sheet to a point where it is lever­aged 50-to-1 against its cap­i­tal ($2.65 tril­lion / $52.6 bil­lion in cap­i­tal as reported the Fed's con­sol­i­dated bal­ance sheet ). This is a greater lever­age ratio than Bear Stearns or Fan­nie Mae, with sim­i­lar inter­est rate risk but less default risk. The Fed holds roughly $1.3 tril­lion in Trea­sury debt, $937 bil­lion in mort­gage secu­ri­ties by Fan­nie and Fred­die, $132 bil­lion of direct oblig­a­tions of Fan­nie, Fred­die and the FHLB, and nearly $80 bil­lion in TIPS and T-bills. The matu­rity dis­tri­b­u­tion of these assets works out to an aver­age dura­tion of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term inter­est rates. Given that the Fed only holds 2% in cap­i­tal against these assets, a 35-basis point increase in long-term yields would effec­tively wipe out the Fed's capital.

Still, the Fed also earns an inter­est spread between its assets and its lia­bil­i­ties, pro­vid­ing about 3% annu­ally (as a per­cent­age of assets) in excess inter­est to eat through, which would allow a fur­ther 50 basis point rise in inter­est rates over a 12-month period with­out wip­ing out that addi­tional cush­ion. Even so, it is clear that if the Fed­eral Reserve was an ordi­nary bank, reg­u­la­tors would quickly shut it down. To avoid the poten­tially untidy embar­rass­ment of being insol­vent on paper, the Fed qui­etly made an account­ing change sev­eral weeks ago that will allow any losses to be reported as a new line item — a "neg­a­tive lia­bil­ity" to the Trea­sury — rather than being deducted from its capital.

Look­ing Ahead

Assets com­pete. If you cre­ate a huge vol­ume of non-interest bear­ing money, some­body some­where has to hold it. So long as close sub­sti­tutes such as Trea­sury bills offer any com­pe­ti­tion at all, investors try to shift out of the non-interest bear­ing stuff into the interest-bearing stuff. Of course, in equi­lib­rium, that sort of shift is impos­si­ble in aggre­gate since some­body still has to hold the money. So the result of the Fed's quan­ti­ta­tive eas­ing is that short-term inter­est rates have dropped to about zero. As long as that hap­pens, peo­ple are OK hold­ing the money, and you don't need to have infla­tion­ary con­se­quences, but the sen­si­tiv­ity to small errors becomes mag­ni­fied. Mean­while, QE has also caused investors to seek out riskier assets, and the result has been an increase in stock prices, com­mod­ity prices and a vari­ety of spec­u­la­tive secu­ri­ties. As prices rise, prospec­tive future returns fall. The process stops at the point where all assets, on a matu­rity– and risk-adjusted basis, are priced to achieve prob­a­ble returns near zero.

And so here we are.

There are a few pos­si­ble out­comes as we move for­ward. One is that the econ­omy weak­ens, and the Fed decides to leave inter­est rates unchanged, or even to ini­ti­ate an addi­tional round of quan­ti­ta­tive eas­ing. In this event, it's quite pos­si­ble that we still would not observe much infla­tion, pro­vided that inter­est rates are held down far enough. Unfor­tu­nately, the larger the mon­e­tary base, the lower the inter­est rate required for a non-inflationary out­come. T-bills are already at less than 4 basis points. In the event of even another $200 bil­lion in quan­ti­ta­tive eas­ing, the liq­uid­ity pref­er­ence curve sug­gests that Trea­sury bill yields would have to be held at lit­er­ally a sin­gle basis point in order to avoid infla­tion­ary pressures.

A sec­ond pos­si­bil­ity is that we observe any sort of exter­nal pres­sure on short-term inter­est rates, inde­pen­dent of Fed pol­icy. In that event, the Fed would have to rapidly con­tract its bal­ance sheet in order to avoid an infla­tion­ary out­come. As noted above, even a quarter-percent increase in short-term inter­est rates would require a full-scale rever­sal of QE2. Alter­na­tively, the Fed could leave the mon­e­tary base alone, and allow prices to restore the bal­ance between base money and nom­i­nal GDP. In order to accom­mo­date short-term inter­est rates of just 0.25% in steady-state, leav­ing the mon­e­tary base unchanged at present lev­els, a 40% increase in the CPI would be required. I doubt that we'll observe this out­come, but it pro­vides some sense of what I mean when I talk about the Fed push­ing mon­e­tary pol­icy to its "unsta­ble limits."

In case the fore­go­ing com­ment seems pre­pos­ter­ous, it's help­ful to remem­ber that the U.S. econ­omy has never held even 10 cents of mon­e­tary base per dol­lar of nom­i­nal GDP except when short-term inter­est rates have been below 2%. We are presently approach­ing 17 cents. So you can think of the sit­u­a­tion this way. Short-term inter­est rates of 2% are con­sis­tent with money demand of about 10 cents of base money per dol­lar of GDP. To get there, with the mon­e­tary base unchanged, you would have to increase nom­i­nal GDP (mostly through price increases) by 70%. Again, because the rela­tion­ship is non-linear, this impact would be front-loaded. Sig­nif­i­cant infla­tion pres­sure would emerge in response to an increase of even 0.25% — 0.50% in short-term inter­est rates. His­tor­i­cally, it has taken about 6–8 months for such pres­sures to trans­late into observed inflation.

A third pos­si­bil­ity is that the Fed inten­tion­ally reduces the mon­e­tary base, grad­u­ally mov­ing inter­est rates higher as Plosser sug­gests. This is undoubt­edly the best course, in my view, but it's impor­tant to rec­og­nize that there are already sub­stan­tial risks baked in the cake as a result of the Fed's reck­less­ness up to this point. The first 25 basis points will require an enor­mous con­trac­tion of the Fed's bal­ance sheet. Risky assets have already been pushed to price lev­els that now pro­vide very weak prospec­tive returns. Our 10-year annual total return pro­jec­tion for the S&P 500 remains in the 3.4% area. Expected returns for shorter hori­zons are near zero or neg­a­tive, but are asso­ci­ated with greater poten­tial vari­abil­ity. Com­mod­ity prices have been pre­dictably dri­ven higher by the hoard­ing that results from neg­a­tive short-term inter­est rates (if you expect infla­tion, but inter­est rates don't com­pen­sate, you have an incen­tive to buy stor­able goods now, and this process stops when com­mod­ity prices are so high that they are actu­ally expected to depre­ci­ate rel­a­tive to a broad bas­ket of goods and ser­vices, to the same extent that money is expected to depreciate).

In short, the out­come of the present sit­u­a­tion need not be rapid infla­tion, and need not be steep mar­ket losses. Rather, the pre­dictable out­come is insta­bil­ity. If you put a brick on a flag­pole, and keep rais­ing the flag­pole and adding more bricks, you don't have the lux­ury of pre­dict­ing when the bricks will fall, or in what direc­tion. What you do know, how­ever, is that the sit­u­a­tion is not sta­ble. Peo­ple may briefly be rewarded for stand­ing directly below, cheer­ing, while brand­ing any­one who keeps their dis­tance as fools or worse. But if you look closely, those cheer­lead­ers are typ­i­cally hid­ing enor­mous welts, scars and gashes from being repeat­edly smacked over the head — if you look even closer, you'll find that they have typ­i­cally thrived no bet­ter for it over the long-term. While it's pos­si­ble to con­tinue with­out unpleas­ant events, the Fed has already placed the course of the econ­omy, infla­tion, and the finan­cial mar­kets beyond a com­fort­able scope of con­trol should sur­prises emerge.

Mar­ket Climate

As of last week, the Mar­ket Cli­mate for stocks was char­ac­ter­ized by a syn­drome of over­val­u­a­tion, over­bought con­di­tions, over­bull­ish sen­ti­ment, and ris­ing yield pres­sures that has his­tor­i­cally been hos­tile to stocks on aver­age. Every com­po­nent of this syn­drome wors­ened last week. Our esti­mate of 10-year pro­jected total returns for the S&P 500 is presently just 3.4% annu­ally, the major indices remain over­bought on an intermediate-term basis, and Investors Intel­li­gence reports that bull­ish sen­ti­ment has surged to 57.3% bulls and only 15.7% bears, which is close to the spread we observed at the 2007 mar­ket peak. Investors Intel­li­gence observes "extreme read­ings, as we are expe­ri­enc­ing right now, his­tor­i­cally have major sig­nif­i­cance." Mean­while, upward inter­est rate pres­sures reasserted them­selves last week. Both Strate­gic Growth Fund and Strate­gic Inter­na­tional Equity remain well hedged here.

Impor­tantly, our defen­sive stance is not dri­ven by the expected com­ple­tion of QE2, nor our con­sid­er­able doubts about the poten­tial for a suc­cess­ful eco­nomic "hand­off" to the pri­vate sec­tor in the face of tight­en­ing fed­eral and state bud­gets and a fis­cal cliff as stim­u­lus fund­ing to the states rolls off about mid-year. All of those con­sid­er­a­tions make us aware of poten­tial risks, but in prac­tice, we are defen­sive based on testable and observ­able mar­ket con­di­tions that have his­tor­i­cally been asso­ci­ated with a neg­a­tive return/risk pro­file, on average.

Though the mar­ket has not recov­ered to its Feb­ru­ary highs here, the mea­sures that define the "over­val­ued, over­bought, over­bull­ish, ris­ing yields" syn­drome are actu­ally worse now, on bal­ance. While there remains a pos­si­bil­ity that we can clear some com­po­nent of this syn­drome with­out also observ­ing a strong dete­ri­o­ra­tion in broader mar­ket inter­nals (includ­ing breadth across indi­vid­ual stocks, indus­tries, and sec­tors, lead­er­ship mea­sures, price-volume action across a wide range of indus­tries and secu­rity types, and other fac­tors), con­di­tions are so extended here that there is now only a nar­row "win­dow" between a mar­ket decline that would be suf­fi­cient to clear the over­bought or over­bull­ish com­po­nents of the present hos­tile syn­drome, and a mar­ket decline that would sig­nal a larger and more robust shift toward investor risk aver­sion. Put sim­ply, a mar­ket decline that clears this syn­drome could be a whop­per. That said, we'll respond to the evi­dence as it emerges, and will con­tinue to look for oppor­tu­ni­ties to accept expo­sure to mar­ket fluc­tu­a­tions as the over­all return/risk pro­file improves.

In bonds, the Mar­ket Cli­mate dete­ri­o­rated last week. On Tues­day, in response to evi­dence of accel­er­at­ing yield pres­sures, as well the recog­ni­tion that QE2 was much fur­ther along than investors widely seem to believe, we sub­stan­tially cut our bond dura­tion to about 1.5 years in Strate­gic Total Return.

In gold, the fur­ther advance in prices on shal­low cor­rec­tions brings us back to the con­cern I expressed a few weeks ago about bubble-type action. Sil­ver prices are dis­play­ing even more exag­ger­ated "log-periodic" behav­ior, as are some agri­cul­tural com­modi­ties. We don't know exactly when this will end, but we would pre­fer to scale back early rather than late. A Sornette-type analy­sis (see Anatomy of a Bub­ble ) sug­gests a "finite-time sin­gu­lar­ity" within days or weeks. Any addi­tional upward leaps in price, with very shal­low cor­rec­tions and increas­ing volatil­ity at 10-minute inter­vals would strengthen that impres­sion fur­ther. I've been gen­er­ally bull­ish on gold since Sep­tem­ber of 2000, when it was below $300 an ounce and we observed a clearly favor­able shift in the set of con­di­tions I noted in Going for the Gold . Our actual gold mod­els are more elab­o­rate in prac­tice, but as I noted back then, pre­cious met­als shares tend to per­form far bet­ter in the face of falling Trea­sury yields, par­tic­u­larly when the ISM indices are weak. Those con­di­tions are absent at present, and the recent extreme price behav­ior is of some con­cern. The rally in gold stock prices late in the week gave us an oppor­tu­nity to clip our expo­sure back to about 6% of assets in Strate­gic Total Return. The risks in pre­cious met­als are clearly increasing.

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Tags: Balance Sheet, Bank Reserves, Basis Points, BRIC, BRICs, Charles Plosser, Collapse, Commodities, Contraction, Credit Crisis, Gold, Hussman Funds, Inflationary Expansion, John Hussman, Liquidity Preference, Monetary Base, Money Markets, Nominal Gdp, Predictable Outcome, Qe2, Term Interest, Term Yields, Treasury Bills, Treasury Yields
Posted in Commodities, Credit Markets, Emerging Markets, Gold, Markets, Silver | Comments Off

Gold Market Cheat Sheet (April 4, 2011)

Saturday, April 2nd, 2011

Gold Mar­ket Cheat Sheet (April 4, 2011)

For the week, spot gold closed at $1,428.80, down $0.94 per ounce, or 0.07 per­cent for the week. Gold equi­ties, as mea­sured by the Philadel­phia Gold & Sil­ver (XAU) Index, rose just 0.13 per­cent. The U.S. Trade-Weighted Dol­lar Index (DXY) resumed its fall and gave up 0.49 per­cent for the week.

Strengths

• It appears that Chi­nese gold demand con­tin­ues to run at a very high level. Fab­ri­ca­tors in China are report­ing dif­fi­culty in obtain­ing suf­fi­cient sup­plies for their busi­nesses. China’s Eng­lish Lan­guage TV sta­tion, part of state-owned CNTV, reported that gold demand is going “through the roof” despite the post-Chinese New Year period usu­ally being a slow one for gold sales.
• One gold fab­ri­ca­tor in China noted that sales for his busi­ness have been grow­ing at the rate of 20 per­cent a month over the last cou­ple of years. Gold demand in China has largely off­set the slow­ing rate of demand for exchanged traded bul­lion funds in the U.S.
• The French Mint reported a sharp rise in demand for their offer­ings of a grow­ing selec­tion of gold and sil­ver coins to lure col­lec­tors and peo­ple look­ing for a secure invest­ment last year. “There is a real collector’s phe­nom­e­non around the coins that we pro­duce,” the Mint’s chief exec­u­tive told reporters.

Weak­nesses

• For­eign min­ing firms in Zim­babwe must sell a major­ity stake to local black investors within six months, accord­ing to a release from the gov­ern­ment. It also said com­pa­nies had 45 days in which to sub­mit details of how they planned to trans­fer own­er­ship. Once pub­lished, it effec­tively becomes law.
• The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD), posted its biggest quar­terly drop in assets since its incep­tion dur­ing the first three months of 2011. The decline was fueled by the prospect of inter­est rate hikes and gains in other com­modi­ties drove investors to sell. The SPDR Gold Trust’s gold hold­ings were down 5.4 per­cent to 1,211 tons dur­ing the quar­ter. How­ever, their hold­ings may have declined due to other gold bul­lion prod­ucts, which have low­ered their fee struc­tures and can be more tax effi­cient to investors.
• “Con­cerns about infla­tion would trig­ger demand for gold as a store of value, but the pre­cious metal’s bull run may be near its end,” China’s Cen­tral Bank said this week. “We need to note that gold prices have reached his­tor­i­cal highs, and its down­ward risks should not be overlooked.”

Oppor­tu­ni­ties

• Ecuador expects min­ing com­pa­nies to invest $7 bil­lion in gold and cop­per projects over the next seven years, as the OPEC mem­ber tries to diver­sify its econ­omy by encour­ag­ing min­ing activ­ity. Nat­ural Resources Min­is­ter Wil­son Pas­tor said five project con­tracts will be signed in the next few months. “The invest­ment in the five projects will reach $7 bil­lion in an accu­mu­lated way. The cycle to put the mines at full capac­ity will last approx­i­mately seven years,” Pas­tor told reporters.
• Jason Ham­lin, founder of Gold Stock Bull, recently noted “I believe gold has a good chance of hit­ting $1,800 per ounce by year-end. That’s been my tar­get. Gold could then eas­ily pass its offi­cial infla­tion­ary adjusted high of $2,300 per ounce next year. The true inflation-adjusted high for gold is some­what closer to $5,000 per ounce if we’re not using the sup­pressed gov­ern­ment sta­tis­tics. I think there’s a good chance that gold will sur­pass that fig­ure before the bull mar­ket is over.”
• GFMS, one of the world’s fore­most met­als con­sul­tancy firms, reit­er­ated its bull­ish out­look on gold due to numer­ous eco­nomic and polit­i­cal fac­tors. GFMS sees a gold price of $1,500 per ounce with the $1,600 mark within range this year. The firm says their out­look depends on how major economies of the world grow and how gov­ern­ments of major economies attempt to main­tain this growth.

Threats

• Peru­vian pres­i­den­tial can­di­date Keiko Fuji­mori said that if elected she might tax the wind­fall prof­its of firms in Peru’s vast min­ing sec­tor. Two other lead­ing can­di­dates in the April 10 race, for­mer Pres­i­dent Ale­jan­dro Toledo and Ollanta Humala, have also expressed sup­port for more tax­ing of min­ing com­pa­nies in Peru, one of the world’s top exporters of min­er­als. How­ever, min­ing com­pa­nies bris­tle at what they have called pop­ulist pol­icy pro­pos­als and say higher taxes would dis­cour­age bil­lions of dol­lars in for­eign investment.
• Indone­sia will need between $500 mil­lion and $1 bil­lion a year in new invest­ments for explo­ration activ­i­ties to main­tain present lev­els of min­eral pro­duc­tion, the Indone­sian Min­ing Asso­ci­a­tion claims. Asso­ci­a­tion chair­man Mar­tiono Hadianto says that in the past decade, Indone­sia allo­cated only $10 mil­lion a year for explo­ration to find new min­eral reserves in exist­ing min­ing areas. He added that the Indone­sian gov­ern­ment had to work harder to cre­ate a more com­pet­i­tive and investor-friendly fis­cal régime in order to attract more invest­ments to the min­ing indus­try. “The min­ing indus­try is capital-intensive. The gov­ern­ment needs to offer com­pet­i­tive incen­tives to be able to com­pete in attract­ing investors to con­duct busi­nesses in Indone­sia,” he suggested.
• For a num­ber of the large low-grade mul­ti­mil­lion ounce gold deposits being hyped by the Street today, investors need to be cau­tious. The pri­mary con­cern that is com­pounded at these projects right now is cap­i­tal and oper­at­ing costs. The lower the ore grades, the more cap­i­tal will be at stake to achieve through­put rates that can carry the eco­nom­ics. When financ­ing these types of projects, they are more likely to be forced to sell their gold for­ward in order to lock in a known rev­enue stream. How­ever, these hedg­ing arrange­ments do noth­ing to pro­tect the investor from ris­ing costs and project failure.

Tags: BRIC, BRICs, China, Commodities, Gold
Posted in Commodities, Emerging Markets, Gold, Markets, Outlook, Silver | Comments Off

Revolution Or Evolution In The World Oil Market?

Wednesday, March 30th, 2011

Rev­o­lu­tion Or Evo­lu­tion In The World Oil Mar­ket?

By Bob van der Valk

Time has not made much of a dif­fer­ence since 2008...at least in the price of crude.  The price for the U.S. West Texas Inter­me­di­ate (WTI) crude oil was $107 a bar­rel on Sep­tem­ber 28, 2008, vs. around $105 per bar­rel today.

On the other hand, the aver­age price at the pump was $2.57 a gal­lon then, com­pared with the aver­age is $3.58 per gal­lon today.  The chart below shows the aver­age price for the period from March 24, 2009 through March 24, 2011):

The rea­sons for the dif­fer­ence in the pric­ing of gaso­line is exactly the oppo­site of why they were back on Sep­tem­ber 28, 2008.  Back then, the US econ­omy went into a tail­spin with fuel prices decreas­ing faster than crude oil prices. They even­tu­ally caught up with each other in early 2009 and have been increas­ing in-sync ever since.

Today's fuel prices are keyed more to the Brent crude oil price post­ing on the Inter­con­ti­nen­tal Exchange (ICE) in Lon­don instead of the WTI crude oil post­ing on the New York Mer­can­tile Exchange (NYMEX), which has become some­what incon­se­quen­tial since it is land­locked in Cush­ing, Oklahoma.

Cush­ing, OK is the deliv­ery point of NYMEX from where WTI is shipped by pipeline to var­i­ous U.S. Mid­west and Gulf Coast refiner­ies.  In con­trast, the Brent crude oil inven­to­ries are held at a har­bor in Bel­gium eas­ily reached by any ship able to carry large amounts of crude oil into and out of that location.

The volatil­ity in the price of crude is caused by any world events threat­en­ing crude oil sup­plies as they are the world's main source of energy.  Wall Street bankers and their clients are a big influ­ence in the com­mod­ity mar­ket and tend to exag­ger­ate prices by mak­ing bets for or against the price of crude oil caus­ing spec­u­la­tion in the
oil markets.

Prior to the 1980’s, the price of crude oil was set by the par­ties involved in actu­ally pro­duc­ing and refin­ing it. That changed when the NYMEX started trad­ing first in crude oil and gasoline, and added nat­ural gas and heat­ing oil later on.

Phys­i­cal and futures mar­kets were meant to run respond­ing to actual sup­ply and demand, but instead have added a layer of uncer­tainty for any­one pro­duc­ing fuel in order to keep prices within an afford­able range to their consumers.

The Com­mod­ity Futures Trad­ing Com­mis­sion (CFTC) is now propos­ing lim­its for energy spec­u­la­tors. Ten big US banks will be affected the most and will have the option to trade on the Inter­con­ti­nen­tal Exchange (ICE) based in Lon­don, which does not have any trad­ing limits.

Now, the Mid­dle East and North African (MENA) rev­o­lu­tions have also been added to the equa­tion mak­ing crude oil a com­mod­ity spec­u­la­tors dream to come true.  Trou­ble brew­ing in MENA and Saudi Ara­bia will keep both crude oil and fuel prices on an ever increas­ing path until the unrest set­tles down.

Iran­ian Oil Min­is­ter Mas­soud Mirkazemi, who cur­rently holds the OPEC rotat­ing pres­i­dency, was quoted as saying:

"There is no need for an OPEC emer­gency meet­ing in the cur­rent sit­u­a­tion as the oil mar­ket is well bal­anced. OPEC is only able to pump about 30 mil­lion bar­rels of oil to the world mar­kets per day, which is nearly a third of the global oil production."

This was reported by the local Eng­lish lan­guage satel­lite Press TV in Tehran, Iran report on Sun­day, March 28, 2010.

OPEC will cut oil ship­ments to its low­est level since Octo­ber as civil war halted exports of crude oil from Libya. OPEC oil exports are due to fall to 23 mil­lion bar­rels a day in the four weeks to 9th April, down 1.8 per­cent from 23.5 mil­lion in the period to 12th March.

Oil pro­duc­ers typ­i­cally respond to strong price sig­nals and are able afford to wait until OPEC’s reg­u­lar meet­ing in the mid­dle of June before decid­ing whether to raise crude oil out­put. It will be too lit­tle too late to pre­vent higher oil prices.

Crude oil prices are deter­mined on a “futures” mar­ket at the NYMEX or ICE. The prices of crude oil traded today deter­mine the future prices at the pump.  Thus, if the spec­u­la­tors see cur­rent inven­to­ries are suf­fi­cient to cover demand until futures con­tracts are deliv­ered, the down­ward price hap­pens almost immediately.

A war and rev­o­lu­tion in Libya has caused higher prices for gaso­line and diesel all the way in the U.S.  The lyrics in John Lennon’s song Rev­o­lu­tion are as applic­a­ble today as they were back in 1968,

“You say you want a rev­o­lu­tion? Well you know, we'd all want to change the world. But if you want money for peo­ple with minds that hate, all I can tell you is brother you'll have to wait”

About The Author - Bob van der Valk is an Inde­pen­dent Con­sul­tant with over 50 years of expe­ri­ence in the petro­leum gaso­line and lubri­cants industry.

The views and opin­ions expressed herein are the author's own and do not nec­es­sar­ily reflect those of Econ­Mat­ters.

Tags: Brent Crude Oil, Brent Crude Oil Price, BRIC, BRICs, Commodity Market, Crude Oil Inventories, Crude Oil Price, Crude Oil Prices, Crude Oil Supplies, Cushing Oklahoma, Delivery Point, energy, Gulf Coast Refineries, Intercontinental Exchange, Market Revolution, Mercantile Exchange Nymex, New York Mercantile Exchange, oil, Price Of Crude Oil, Van Der Valk, West Texas Intermediate, World Oil Market, Wti Crude Oil, York Mercantile Exchange
Posted in Emerging Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Not All Emerging Markets Are Equal

Tuesday, March 29th, 2011

Not All Emerg­ing Mar­kets Are Equal

While emerg­ing mar­kets actu­ally pro­vided a safe haven dur­ing the equity market's most recent sell off, not all emerg­ing mar­kets have been per­form­ing equally.  While the BRIC coun­tries have become syn­ony­mous with emerg­ing mar­kets, most of the BRICs have been lag­ging.  In US Dol­lar adjusted returns, the only BRIC that has out­per­formed the United States over the last year is Rus­sia, which has ral­lied more than 28%.

Copy­right © Bespoke Invest­ment Group

Tags: BRIC, Bric Countries, BRICs, Emerging Markets, Investment Group, Russia, Safe Haven, United States
Posted in Emerging Markets, Markets | Comments Off

What's Driving Russia's Outperformance?

Sunday, March 27th, 2011

What's Dri­ving Russia's Outperformance?

By Frank Holmes, John Der­rick and Tim Steinle, Co-managers of the U.S. Global Investors East­ern Euro­pean Fund (EUROX)

The Russ­ian MICEX Index, which increased 22.5 per­cent in 2010, has jumped 15 per­cent so far in 2011, sig­nif­i­cantly out­per­form­ing many other mar­kets.

China is the second-best per­former of the BRICs, ris­ing more than 5 per­cent, while India (down over 10 per­cent) and Brazil (down over 2 per­cent) have lagged. Over­all, the MSCI Emerg­ing Mar­kets Index has dropped just over 1 percent.

This has effec­tively recou­pled Rus­sia with the other BRIC coun­tries. The Russ­ian econ­omy lagged out-of-the-gate once the global recov­ery began, lead­ing some to ques­tion whether it belonged in the same cat­e­gory as Brazil, China and India. Those sen­ti­ments seemed pre­ma­ture and symp­to­matic of an anti-Russia mindset.

Russian’s out­per­for­mance has been dri­ven by sev­eral fac­tors. First, the Russ­ian ruble has appre­ci­ated 7 per­cent against the U.S. dol­lar, boost­ing stock mar­ket per­for­mance for U.S. investors.  This devel­op­ment also has a long-term ben­e­fit as a strong ruble ben­e­fits the country’s domes­tic sec­tors, some­thing we’ll dis­cuss later.

A sec­ond fac­tor dri­ving Rus­sia has been the geopo­lit­i­cal and nat­ural dis­as­ter events that have tran­spired dur­ing the past few weeks. Rus­sia is rel­a­tively safe from the type of polit­i­cal upris­ings seen in the Mid­dle East and North Africa. Its gov­ern­ment is decid­edly pop­u­lar with the pub­lic and the one-two punch of Pres­i­dent Medvedev and Prime Min­is­ter Putin give the gov­ern­ment clout on both inter­na­tional and domes­tic fronts.

The price of oil has risen roughly 25 per­cent since the unrest and tur­moil began in the Mid­dle East and North Africa.  As an energy exporter of crude oil and nat­ural gas, Rus­sia is one of the few large economies in the world that directly ben­e­fits from higher energy prices.

Rus­sia is the world’s largest oil pro­ducer and it’s esti­mated that for every $10 increase in the aver­age annual price of oil, Russia’s rev­enues rise by $20 bil­lion, accord­ing to the Finan­cial Times.  Since Rus­sia is not a mem­ber of OPEC, it is not bound by pro­duc­tion caps and can increase pro­duc­tion as it sees fit while prices are at ele­vated levels.

Rus­sia is also the world’s top exporter of nat­ural gas and Strat­for Intel­li­gence points out the sit­u­a­tion in Libya has shut down 11 bil­lion cubic-meters of nat­ural gas flow to Italy. As Europe’s third-largest con­sumer of nat­ural gas, Italy has turned to Rus­sia for gas sup­plies. In addi­tion, a shut­down of sev­eral Japan­ese nuclear facil­i­ties could mean as much as a 14 per­cent increase in nat­ural gas con­sump­tion to meet the Japan’s energy demands.

In the energy sec­tor, the East­ern Euro­pean Fund (EUROX) port­fo­lio empha­sizes com­pa­nies that show strong growth in pro­duc­tion, reserves and cash flow, rel­a­tive to their peers. Specif­i­cally, Novatek, Ros­neft and TNK-BP fit this profile.

Russ­ian energy equi­ties, which carry the largest weight­ing in the MICEX, have gained 25 per­cent this year. This is higher than non-oil Russ­ian equi­ties, which have risen only 7.7 per­cent. How­ever, as oil and gas taxes swell the government’s rev­enue, these funds are increas­ingly allo­cated to social and pub­lic works pro­grams which are likely to cre­ate an oppor­tu­nity for non-energy related equi­ties. These sec­tors appear poised to ben­e­fit from the cur­rent macro­eco­nomic environment.

This table from Mer­rill Lynch shows the per­for­mance of the dif­fer­ent sec­tors of the Russ­ian mar­ket fol­low­ing a sus­tained rise in oil prices. Mer­rill Lynch com­piled research on the seven instances where oil prices rose 20 per­cent in a two-month span and main­tained at least half those gains over the fol­low­ing six month period.

His­tor­i­cally, the aver­age gain for Russ­ian equi­ties is more than 34 per­cent. While energy gen­er­ally jumps out ahead when oil prices move higher, you can see that it lags other sec­tors as the rally pro­gresses. We have long been pos­i­tive on both Russ­ian finan­cials and the con­sumer sec­tor and these sec­tors appear well posi­tioned going forward.

Consumer-oriented equi­ties such as retail­ers have his­tor­i­cally been the best per­form­ers, net­ting an 85 per­cent gain on aver­age and triple the gain of energy equi­ties. Retail­ers X5 and Mag­nit should be able to cap­i­tal­ize on these trends. Russ­ian finan­cials are next with an aver­age 83 per­cent gain. Sber­bank, Russia’s largest bank, is the largest hold­ing in EUROX.

Another area that could directly ben­e­fit from the Kremlin’s cash-filled pock­ets is infra­struc­ture. Rus­sia is in dire need of a sig­nif­i­cant revamp­ing of its infra­struc­ture. Sim­i­lar to the Amer­i­can Soci­ety of Civil Engi­neers report that rates America’s  infra­struc­ture a “D,” the World Eco­nomic Forum says the qual­ity of Russia’s infra­struc­ture lags that of other emerg­ing coun­tries such as South Africa, Turkey, China and Mexico.

The areas most in need of upgrad­ing are Russia’s trans­porta­tion and elec­tri­cal power grid. The qual­ity of Russia’s roads ranks in the bottom-third in the world, accord­ing to Mer­rill Lynch, and it’s esti­mated that Rus­sia loses 6 per­cent of GDP each year due to under­de­vel­oped roads. In fact, the com­bined length of Russia’s road­ways declined 6 per­cent between 2002 and 2010 despite a 60 per­cent increase in car pen­e­tra­tion, Merrill-Lynch says.

It’s a sim­i­lar story for Russia’s air­ports and rail net­work. Rus­sia cur­rently has roughly 300 oper­a­tional air­ports but just 40 per­cent of them have paved run­ways and 30 per­cent do not have an air­field light­ing sys­tem, Mer­rill Lynch says. The rail net­work, almost entirely con­structed dur­ing the Soviet era, is highly con­cen­trated in the West­ern region of the coun­try and is esti­mated to require more than $70 bil­lion in invest­ment for upgrades and repairs by 2020, accord­ing to Mer­rill Lynch.

Russia’s aging power grid is unre­li­able and acci­dent prone. Mer­rill Lynch projects that sig­nif­i­cant invest­ment by 2020 is required to update and mod­ern­ize the grid. With indus­trial con­sumers account­ing for 85 per­cent of elec­tri­cal con­sump­tion, keep­ing the power up and run­ning is essen­tial to main­tain­ing Russia’s indus­trial pro­duc­tion levels.

To finance the much needed infra­struc­ture improve­ments, the Russ­ian gov­ern­ment cre­ated the $420 bil­lion Fed­eral Tar­get Pro­gram (FTP). The FTP focuses on key trans­porta­tion areas such as rails, autos, marine and civil aviation.

The FTP has spe­cific goals to meet by 2015 such as increas­ing the per­cent­age of roads that meet fed­eral stan­dards by 23 per­cent. The plan also calls for a 47 per­cent increase in the ship­ment of goods and a 40 per­cent increase in air­line pen­e­tra­tion through improve­ments of avi­a­tion infra­struc­ture.

In addi­tion to the FTP, three spe­cial events will help drive Russia’s infra­struc­ture spend­ing: The 2012 Asia-Pacific Eco­nomic Coöper­a­tion (APEC) Sum­mit, 2014 Win­ter Olympics in Sochi and the 2018 World Cup. Mer­rill Lynch esti­mates that total spend­ing for the World Cup will reach $50 bil­lion. Con­struc­tion for the Games in Sochi includes 161 miles of roads and 65 miles of rails, and the APEC calls for 48 new objects to be con­structed for a total of $83 million.

While higher energy prices are in dan­ger of slow­ing down con­sumers in the U.S., West­ern Europe and cer­tain emerg­ing mar­ket coun­tries, it has the oppo­site effect for the Russ­ian econ­omy. With increased cash flow from its nat­ural gas and crude oil exports, the Russ­ian gov­ern­ment has the much needed cap­i­tal to invest in the country’s aging infra­struc­ture and to sup­port domes­tic consumption.

This should drive out­per­for­mance of Russ­ian mar­kets through­out 2011 and stim­u­late demand for infrastructure-related com­modi­ties such as crude oil, cop­per, cement and iron ore.

Tags: Brazil, BRIC, Bric Countries, BRICs, China, Commodities, Disaster Events, Domestic Sectors, Emerging Markets, energy, Frank Holmes, Global Recovery, Holmes John, India, Infrastructure, John Derrick, Micex, Msci Emerging Markets, Msci Emerging Markets Index, Natural Disaster, oil, Oil Producer, Outperformance, Russia, Russian Economy, Russian Ruble, Steinle, Stock Market Performance, Term Benefit, U S Global Investors
Posted in Brazil, Commodities, Emerging Markets, Energy & Natural Resources, India, Infrastructure, Markets, Oil and Gas | Comments Off

China Surpasses Japan in % of World Market Cap

Wednesday, March 23rd, 2011

China Sur­passes Japan in % of World Market Cap

by Bespoke Invest­ment Group

Japan's stock mar­ket declined nearly 20% in the days imme­di­ately fol­low­ing the tragic earth­quake that hit the coun­try on March 11th.  While Japan­ese equi­ties have bounced back a bit, the fall allowed China to sur­pass Japan in terms of per­cent­age of world mar­ket cap.

Below is a table show­ing the per­cent­age of world mar­ket cap for the largest equity mar­kets in the world.  As shown, the US con­tin­ues to hold onto the num­ber one spot by a wide mar­gin at 30.43%.  Japan had the sec­ond largest mar­ket cap in the world at the start of the year, but China has now sur­passed Japan and cur­rently ranks sec­ond.  China cur­rently makes up 7.38% of world mar­ket cap, while Japan makes up 7.05%.  The UK ranks fourth at 6.49%, fol­lowed by Hong Kong (4.77%), Canada (4.38%), and France (3.59%).

The table also shows where things stood at the start of 2005, the start of the last bear mar­ket, and the start of the cur­rent bull mar­ket.  While things haven't changed dra­mat­i­cally over the past few years, the big shift came in the mid-2000s when China and other emerg­ing mar­kets were grow­ing rapidly.  As shown, China made up just 1.25% of world mar­ket cap at the start of 2005 while the US made up 42.22%.  By late 2007, China had grown to 5.89%, and the other BRICs all saw their % of world mar­ket caps dou­ble.  The US, on the other hand, dropped from 42.22% to 31.07%.

Below is a chart that high­lights how the per­cent­age of world mar­ket caps have changed since the start of 2005 (ex-US).  Here it's easy to see the gains that emerg­ing mar­kets have made at the expense of devel­oped nations.

Finally, we pro­vide a chart show­ing the % of world mar­ket cap for Japan and China going back to 2004.  China didn't even rank in the top ten in 2004, while Japan made up nearly 12% of world mar­ket cap.  Within four years, China and Japan were essen­tially the same size.  During the finan­cial cri­sis, China fell more than Japan, allow­ing Japan to move solidly back into 2nd place.  How­ever, as men­tioned ear­lier, the recent fall in Japan has allowed China to take over the #2 spot.

Tags: 2000s, Bear Market, BRIC, BRICs, Canadian Market, Cap World, Caps, China, China Market, Current, Developed Nations, Emerging Markets, France 3, Hong Kong, Investment Group, Japan, Japanese Equities, Market Cap, Stock Market, Tragic Earthquake, Wide Margin, World Market
Posted in Canadian Market, Emerging Markets, Markets | Comments Off

Warren Buffett: Full Transcript of March 3, 2011 CNBC Visit

Wednesday, March 16th, 2011

via My Invest­ing Notebook

War­ren, it's great to see you this morning.

WARREN BUFFETT(Berk­shire Hath­away Chair­man and CEO): It's good to have you here.

BECKY: Thanks for com­ing down and being in front of the store with us.

BUFFETT: Yeah, well, it makes me feel at home.

BECKY: Yeah. This is, again, a mock-up of your grandfather's store where you worked, yourself.

BUFFETT: Yeah, actu­ally this is my great-grandfather's...

BECKY: Your great-grandfather.

BUFFETT: Yeah. Because my grand­fa­ther didn't work at this store. But it was orig­i­nally Sid­ney Buf­fett & Sons. And he had two sons that worked with him, Ernest and Frank, and then they fell in love with the same woman who worked in the store. She mar­ried one of them, and the other one didn't speak to the guy for 20 years.

BECKY: Which is why it's only the Ernest Buf­fett store.

BUFFETT: Yeah, that's right. That's right.

BECKY: Well, want to thank you very much for being here and for agree­ing to take ques­tions from our view­ers today.

BUFFETT: That'll be fun.

BECKY: It will be fun. We have a lot to get to this morn­ing, but before we do, we'd like to get to a few of those hun­dreds of e-mails. We're going to get to those in just a lit­tle bit. First, though, Carl's going to bring us up to speed on what's been hap­pen­ing. He's got the morning's top headlines.

And, Carl, good morning.

CARL QUINTANILLA, co-host:

All right. Good morn­ing to you, Beck. It's going to be great.

***

QUINTANILLA: But we've got a lot going on this morn­ing, Becky, as you know, and we'll send it back to you in Omaha. Gor­geous live shot this morn­ing, by the way.

BECKY: Oh, thank you very much, Carl. We are again here spend­ing the morn­ing with War­ren Buf­fett and, as we men­tioned, we're at the Durham Museum here in Omaha. We're in front of a mock-up of the Ernest Buf­fett gro­cery store, which is a store Mr. Buf­fett knows well. He worked there him­self as a youngster.

And, War­ren, thank you again for being with us this morning.

BUFFETT: Oh, thank you. That was the last time I did any real work, actually.

BECKY: Since then it's got­ten a lit­tle easier?

BUFFETT: It's much eas­ier. I—the only thing I learned from that store was I didn't like hard work.

BECKY: Well, that's a good way to grow up and a good way to fig­ure things out.

BUFFETT: Yeah.

BECKY: You know, I don't know if you just heard Carl and Joe talk­ing a lit­tle bit about the mar­kets and the sit­u­a­tion yes­ter­day. Oil prices seemed to have been dic­tat­ing where the market's been headed for the last week and a half or so. Do you worry about oil prices? Do you worry about what's hap­pen­ing in the Mid­dle East?

BUFFETT: Well, you may worry as a cit­i­zen about what's hap­pen­ing, but in terms of our invest­ments, it—no. It doesn't have any­thing to do with where or Coca-Cola are going to be in five years from now. But I am just no good on day-to-day or week-to-week, month-to-month stock prices and, for­tu­nately, I don't have to be.

BECKY: Yeah. Joe just men­tioned that we spoke with some­one yes­ter­day who said the oil market's doing exactly what it should be, which is over­re­act­ing. He used to run Saudi Aramco, and it's an inter­est­ing posi­tion. Even though you look at these prices, we've heard from Ben Bernanke and oth­ers that this is not some­thing we need to be con­cerned about yet. Is that where you come in on this?

BUFFETT: Well, I just don't know the answer on that. I mean, that would depend on events in the future. Six months or eight months ago, we weren't wor­ried about cot­ton prices at Fruit of the Loom and, you know, they've gone from 80, 90 cents to $1.90. So it's—you just don't know about com­modi­ties.  If they get short and peo­ple need them, I mean, we have to make T-shirts and briefs and that sort of thing, and if there isn't enough cot­ton around in a given month, we buy it regard­less of price. And oil is the same way. The demand is pretty inelas­tic in the short run, so if you get any real inter­rup­tions in big sup­plies of oil—and I know there's excess capac­ity around—but a big enough inter­rup­tion could cause a big change in price.

BECKY: We have not seen a sig­nif­i­cant inter­rup­tion yet, though.

BUFFETT: Right.

BECKY: The Libyan oil mar­ket may be — it's 2 per­cent of the global sup­ply and maybe about half of that has been cut at one point or another.

BUFFETT: Yeah.

BECKY: And yet you see oil prices run­ning back up above $100. That's where they were trad­ing yes­ter­day in the extended hours.

BUFFETT: Yeah.

BECKY: Is that some­thing that you think is tied to spec­u­la­tion? Is that some­thing that is or could be pre­vented? Or is this a real sup­ply situation?

BUFFETT: Well, it isn't a real sup­ply sit­u­a­tion yet, but mar­kets anticipate.

BECKY: Yeah.

BUFFETT: And if—people are not wor­ried about Libya get­ting cut off, what they're wor­ried about is that the unrest spreads and that some three or four mil­lion bar­rels a day would get cut off. And that's a ratio­nal thing to worry about. What the prob­a­bil­ity is of it hap­pen­ing, who knows? But it isn't zero, and it looks higher now than it would've looked two months ago, so that starts to get reflected in prices. Mar­kets anticipate.

BECKY: Your annual share­hold­ers let­ter that you just came out with on Sat­ur­day painted a much more opti­mistic pic­ture of Amer­ica than many peo­ple had been think­ing to this point. Why is that? And why are you so pos­i­tive about things?

BUFFETT: Well, I've been opti­mistic on Amer­ica right along, as you know. I mean, I was opti­mistic when I knew things were going to go to hell. But things do—America gets off the track from time to time, and it was par­tic­u­larly so in the fall of 2008. But you can't stop this coun­try. I mean, we have gone through, I don't know, 15 reces­sions, you know, world wars, civil war, you name it. And there is a resiliency to the Amer­i­can sys­tem. It does work. And it sput­ters from time to time. It'll sput­ter from time to time in the future, but you don't want to get too con­cerned about that. It's kind of like hav­ing a bad crop in farm­ing. If you've got some good land here in the Mid­west, you're going to have a bad crop occa­sion­ally. But you know you're going to have mostly good crops and we have great soil for this coun­try, metaphor­i­cally. And it works over time.

BECKY: So what are you see­ing in your busi­nesses right now? You said that we're back on track, but are we chug­ging along? Are we inch­ing a long? How are things coming?

BUFFETT: It's prob­a­bly closer to inch­ing in most busi­nesses. And in res­i­den­tial con­struc­tion, it's not inch­ing. It's not going at all. But so you do have this uneven sit­u­a­tion. We have a few busi­nesses that are—that are really kind of boom­ing, but—and we have a great many busi­nesses that are mov­ing for­ward, and then we have some—a few that are stuck. And—but I think that's true of the econ­omy. So—but what we've seen now for almost two years is we've seen it get­ting bet­ter. Rather con­sis­tently, but not in a dramatic—at a dra­matic pace. And what has been inter­est­ing to me is that the sen­ti­ment has gone up and down quite a bit dur­ing a period when you really haven't seen all that much change in the under­ly­ing trend.

BECKY: And in terms of your busi­nesses, you say you have some that are boom­ing. Which ones are those?

BUFFETT: Well, I men­tioned the annual report. We've got an elec­tronic com­po­nent distributorship...

BECKY: Mm-hmm.

BUFFETT: ...in a com­pany called TTI, and they're boom­ing in Asia, they're boom­ing in Europe, and they're boom­ing in this coun­try. And they sell these lit­tle things that cost, you know, a cou­ple of pen­nies. It's like sell­ing jelly beans or some­thing of the sort. But they go to all kinds of cus­tomers. And their busi­ness has never been this strong. The rail­road busi­ness has picked up. It's about 60 per­cent of the way back from the bot­tom. If you take the top, and car load­ings take it down to the bot­tom, we've got about 60 per­cent of the way back. So there's a—there's a con­sid­er­able ways to go there, but it's a dif­fer­ent busi­ness than it was two years ago. And it gets bet­ter by the quar­ter, as we go along. We see at our machine tools, small lit­tle tools that go in big tools, a com­pany called Iscar.

BUFFETT: I just got the Jan­u­ary fig­ures and Jan­u­ary was a record month.  And now not by a huge mar­gin, but it just keeps get­ting bet­ter month by month.  So—and nobody's buy­ing those to put them in their homes, you know, or for speculation.

BECKY: Right.

BUFFETT: They're buy­ing them because they're using them.

BECKY: When do we see that actu­ally play out in the jobs mar­ket? That's been the huge con­cern. We've got another jobs report that's com­ing up on Friday.

BUFFETT: Yeah. Our busi­ness at Berk­shire was quite a bit bet­ter in 2010 than 2009, but we only added 3,000 jobs, you know, from 260,000 roughly, on a base. So we added 1 per­cent to jobs net and yet our busi­ness really improved quite a bit more than that.

BECKY: Mm-hmm.

BUFFETT: And there were real gains in pro­duc­tiv­ity achieved on the down­side. Peo­ple, at least when they really had to tighten their belts, they found out they could do it. And I think that period is largely over. I think the gains in busi­ness will be much more reflected by gains in employ­ment going from this point for­ward than they have in the first year and a half or two years of this recovery.

BECKY: Does that mean good news by the end of this year? Or does that mean good news by next year because depend­ing on whose fore­cast you're watch­ing, the employ­ment num­ber could go down significantly.

BUFFETT: Yeah, yeah.

BECKY: This year, or it might take two years.

BUFFETT: I'm not a—I really don't know the answer on that, but if you ask me just to guess...

BECKY: Mm-hmm.

BUFFETT: ...I would guess that that by the—by close to the elec­tion of 2012 that unem­ploy­ment would be prob­a­bly in the low 7s.

BECKY: OK.

BUFFETT: And then how good that'll look to peo­ple, I don't know at the time. But that would be my guess from what I see in business.

BECKY: You men­tioned that the hous­ing busi­nesses that you have are not inch­ing along, they're stuck. You also said, though, in your annual let­ter that you think hous­ing is at a posi­tion where a year from now things might look con­sid­er­ably bet­ter. Tim Gei­th­ner was on the Hill yes­ter­day. He said there's still a lot of pain to work out in hous­ing. And you had 9400 employ­ees that you had laid off in those busi­nesses that cater to housing.

BUFFETT: Right.

BECKY: So when do you think it—you can actu­ally start hir­ing back there?

BUFFETT: Well, we'll hire when hous­ing starts to pick up.

BECKY: Right.

BUFFETT: And they've been now in this 550,000 a year or 600,000 range for quite a while. And they needed to be. The demand for hous­ing comes from house­hold for­ma­tions. I mean, and house­hold for­ma­tions are run­ning con­sid­er­ably higher than hous­ing starts. So they are—the excess hous­ing sup­ply is being sopped up. Not at an incred­i­ble rate, but at a sig­nif­i­cant rate. And that's a coun­ter­bal­ance to the fact that we were build­ing two mil­lion hous­ing units, you know, and peo­ple were—they weren't cre­at­ing two mil­lion fam­i­lies a year at that time. So we were—we were just build­ing too darn many houses. And they don't go away. So the only way to solve that is to under­pro­duce com­pared to house­hold for­ma­tions. And we've been doing that for a cou­ple of years, and that's why my guess is that, in about a year, that we will have sopped up the excess sup­ply. Now, that doesn't mean there's not all kinds of peo­ple who want to sell their house for what they paid for it five years ago.

BECKY: Mm-hmm. Right, right.

BUFFETT: But that's a whole dif­fer­ent ques­tion. I think it's—I think it's—I know hous­ing will pick up at some point, and it seems log­i­cal to me that it should pick up on about a year based on the—on the num­ber of units that are get­ting sopped up. And it was—it's a good thing. I mean, we had that one incen­tive there for a while to try to move housing.

BECKY: A tax break for first-time buyers.

BUFFETT: The real thing to do is clean out the excess inven­tory, and the only way you clean out excess inven­tory, you either—you either blow up the houses or you pro­duce fewer than house­holds are get­ting formed.

BECKY: Mm-hmm.

BUFFETT: And any arti­fi­cial accel­er­a­tion of demand, it just means dis­ap­point­ment later on.

BECKY: So you didn't think the gov­ern­ment should've made those moves?

BUFFETT: I don't think—yeah, I don't think that try­ing to move the fourth quarter's demand into the first quar­ter is a—probably not a good idea.  It—we had to clean out the excess.

BECKY: You know, we're just get­ting to the end of a lot of gov­ern­ment pro­grams like that. Not only what we saw with Cash for Clunk­ers, with the first time hire—buyers tax credit or tax deduc­tion that would go in. You also are get­ting to the point where QE2 is near­ing a point where it's going to end. Now, Ben Bernanke was on Capi­tol Hill yes­ter­day, too, and he did not give any indi­ca­tion that they'd be end­ing QE2 early, but it only goes through June. So what hap­pens to the mar­kets as, you said they're very for­ward look­ing, as they come to the recog­ni­tion that the Treasury's not going to be there, or the Fed's not going to be there to prop up the Trea­sury mar­ket anymore.

BUFFETT: Well, I do not like—I do not like short-term bonds, and I do not like long-term bonds. And if you push me, I'm sure that I don't like intermediate-term bonds either. I just think it's a ter­ri­ble mis­take to buy into fixed dol­lar invest­ments at these kind of rates, and I've thought so, you know, for sev­eral years now. When peo­ple ran to cash because they were afraid of every­thing, they were really going to the worst invest­ment, you know, that's pos­si­ble. I don't know what'll hap­pen with Trea­sury mar­kets, but we have had—I don't think peo­ple nec­es­sar­ily real­ize we've had mon­e­tary pol­icy with its foot to the floor for a cou­ple of years.

BECKY: Mm-hmm.

BUFFETT: And we needed that to get out of where we were.  How long we need it for is another ques­tion. But the idea of over­dos­ing the patient two years ago was a ter­rific idea. The patient needed every bit of mor­phine or what­ever you put in them that they could take. We came on with fis­cal pol­icy very strong, and what peo­ple don't real­ize about fis­cal pol­icy, we talked about a stim­u­lus bill a cou­ple of years ago.

QUICK: Mm-hmm.

BUFFETT: But a stim­u­lus bill isn't a stim­u­lus bill because you stick the word stim­u­lus on it. I mean, you can call any bill that spends money in Wash­ing­ton a stim­u­lus bill. Stim­u­lus is spend­ing more money by the gov­ern­ment than it's tak­ing in. We are going to do that to the tune of 10 per­cent of GDP this year. We have mas­sive stim­u­lus going on in the United States. Stim­u­lus like you haven't seen since World War II. We just don't call it a stim­u­lus bill. But stim­u­lus is the fed­eral gov­ern­ment spend­ing way more money than it takes in, and you can call it a stim­u­lus bill, you can— you can— you can, you know, you can call it the green flow­ers bill, but what­ever causes the gov­ern­ment to spend a lot more money than it's tak­ing in is stim­u­lus. And when you get to 10 per­cent of GDP you've got mas­sive stim­u­lus. So you've got mas­sive mon­e­tary activ­ity, you've got mas­sive stim­u­lus activ­ity. And then what I think is the most impor­tant fac­tor in com­ing out of the reces­sion is sort of the nat­ural regen­er­a­tive capac­ity of cap­i­tal­ism. I think that's— now I think the other two can be impor­tant, and I think they're psy­cho­log­i­cally impor­tant because peo­ple expect the gov­ern­ment to do that, and they don't— they wouldn't have con­fi­dence if the gov­ern­ment wasn't doing it. But I think the main thing that makes the econ­omy come back is 300 and some mil­lion peo­ple try­ing to fig­ure out how to live bet­ter tomor­row than they're liv­ing today.

QUICK: That sounds like an argu­ment for an end to this. You said— is there too much? You said we needed it then. Have we needed QE2 in some of the lat­est doses?

BUFFETT: Yeah. I don't— I don't think we need as much either mon­e­tary or fis­cal stim­u­lus as is going on. I think— I think we needed— the Amer­i­can pub­lic, the whole world needed to see two years ago that the fed­eral gov­ern­ment when the— when the world was going to try and delever­age and peo­ple were pan­icked over every kind of finan­cial instru­ment, they needed to see the fed­eral gov­ern­ment there big time, and the gov­ern­ment really did its job there in the fall of 2008. They threw in— they threw in every­thing and that was hugely impor­tant in get­ting across to the Amer­i­can peo­ple that they are— was not going to stand idly by while the whole machine came to a stop.

QUICK: Mm-hmm.

BUFFETT: But in terms of the recov­ery going on now, that recov­ery is going on because we've got 70-something man­agers at, you know, Berk­shire try­ing to fig­ure out how to do more busi­ness tomor­row than yes­ter­day. And, you know, just look at what Apple does, or you name the com­pany, or Ama­zon. They are think­ing all the time of how to— how to get their cus­tomers to do more things with them.

QUICK: Let me ask you real quickly— Joe has a ques­tion, too— but I just want to pin you down on this and make sure I'm not mak­ing assump­tions or putting words in your mouth. You think QE2 should end now?

BUFFETT: If I were— yeah, I have enor­mous respect for Ben Bernanke. He knows way— you know, he knows more about the Fed than I do by a fac­tor of 100 to one. But in the end, I don't— I don't think we need more of that now.

BECKY QUICK: Joe, you had a ques­tion as well.

JOE KERNEN: I did. And I want to thank War­ren for join­ing us and giv­ing us all his time. Three hours is— it ben­e­fits us, obvi­ously ben­e­fits view­ers. If you were Char­lie Sheen, I just fig­ured out you'd make $12 mil­lion in three hours. So you're doing this— I don't think we're pay­ing you that. So...

BUFFETT: No, but Char­lie Sheen is— Char­lie Sheen is pay­ing me for being his media adviser, so I guess I'm actu­ally doing very well.

JOE: Some of those— I— when I saw— when he said, "Gnarly," I said, `That has got Buffett's fin­ger­prints on it,' just because you say gnarly.

JOE: Here's, you know, lis­ten­ing to you talk, though, War­ren, when you say with your com­ments about bonds, that makes me think of finan­cial assets in gen­eral, which includes stocks. And I think about the print­ing presses not only in this coun­try, but around the world. You've seen the com­mer­cial, cha-chung, cha-chung, cha-chung, with the cen­tral banks. And there are peri­ods where finan­cial assets are great from the like early '80s to 2000. And I just won­der if there's then peri­ods where hard assets are great. And you see Paul­son and gold and some of these other guys and gold or com­modi­ties. Are you just not com­fort­able with com­modi­ties? Are there times where you should be down­play­ing maybe stocks or busi­nesses and going totally full-bore into com­modi­ties but you're just not com­fort­able doing that?

BUFFETT: No, the alter­na­tive with me, Joe, the alter­na­tive— I don't like— I don't like fixed dol­lar invest­ments at all. I don't like short-term bonds, I don't like long-term bonds. We own a lot of short-term bonds, but that is not because we like them, that's just a park­ing place.

But the alter­na­tive in my view, I mean, cer­tainly com­modi­ties can be an alter­na­tive, but the alter­na­tive is income-producing assets of one sort or another that are not fixed dol­lar type invest­ments. And so I— I've said con­sis­tently for the last few years I would vastly pre­fer to own com­mon stocks than fixed dol­lar invest­ments over a five or 10-year period. I don't know any about the next five hours or five days. And that might very well extend to rental real estate, it might extend to farms. I mean, an invest­ment you're look­ing for some­thing where you put out money now and that asset that you buy gives you back more money over time. Now, the prob­lem with com­modi­ties is that you're bet­ting on what some­body else will pay for them in six months. The com­mod­ity itself isn't going to do any­thing for you.

So there's two types of assets to buy. One is where the asset itself deliv­ers a return to you, such as, you know, rental prop­er­ties, stocks, a farm. And then there's assets that you buy where you hope some­body else pays you more later on, but the asset itself doesn't pro­duce any­thing. And those are two dif­fer­ent games. I regard the sec­ond game as spec­u­la­tion. Now there's noth­ing immoral or ille­gal or fat­ten­ing about spec­u­la­tion, but it is an entirely dif­fer­ent game to buy a lump of some­thing and hope that some­body else pays you more for that lump two years from now than it is to buy some­thing you expect to pro­duce income for you over time. I bought a farm 30 years ago, not far from here. I've never had a quote on it since. What I do is I look at what it pro­duces every year, and it pro­duces a very sat­is­fac­tory amount rel­a­tive to what I paid for it.

If they closed the stock mar­ket for 10 years and we owned Coca-Cola and Wells Fargo and some other busi­nesses, it wouldn't bother me because I'm look­ing at what the busi­ness pro­duces. If I buy a McDonald's stand, I don't get a quote on it every day. I look at how my busi­ness is every day. So those are the kind of assets I like to own, some­thing that actu­ally is going to deliver, and hope­fully deliver to meet my expec­ta­tions over time. A piece of art, you know, may go from $1,000 to $50 mil­lion, but it's depen­dent on what the next guy wants to pay me. The art itself— the paint­ing itself is not going to dis­pense cash. So I have to find some­body that's going to like it more. And with most— with an asset like gold, for exam­ple, you know, basi­cally gold is a way of going along on fear, and it's been a pretty good way of going along on fear from time to time. But you really have to hope peo­ple become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn't pro­duce anything.

BECKY: Well, speak­ing of gold, though, we're look­ing at gold prices and they were at another record high. They're up another $3 today, $1,434 an ounce. And there have been some big fat hedge fund man­agers, like a Paul­son or a David Ein­horn, who have really buck­led down on these bids. Why would you steer clear? And do you think what they're doing is the wrong thing?

BUFFETT: Well, I just don't know. I don't know whether cotton's going to go up.

BECKY: OK.

BUFFETT: I mean, we use a lot of cot­ton. I've watched it go from 80 cents to $1.90. You know, we use a lot of cop­per and I've watched it go from $2 to $4-plus, so I mean there's all kinds of things in this world that are going to go up and down in price. You know, maybe ham­burg­ers will tomor­row. And— but I— I'm— I don't know how to judge that. I do know how to judge to some extent the earn­ing power of some busi­nesses. And the real test of whether you would like it as an invest­ment is whether you would be happy if it never got quoted again, and just in terms of what the asset did for you. But that doesn't— I will say this about gold, if you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet...

BECKY: Uh-huh.

BUFFETT: ...67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today's mar­ket prices about $7 tril­lion. That's prob­a­bly about a third of the value of all the stocks in the United States. So you could have a choice of own­ing a third of all the stocks in the United States or you could have a choice of own­ing that lit­tle block of gold, which can't do any­thing but kind of shine there and make you feel like Midas or Croe­sus or some­thing of the sort.

Now, for $7 tril­lion, there are roughly a bil­lion of farm— acres of farm­land in the United States. They're val­ued at about $2 1/2 tril­lion. It's about half the con­ti­nen­tal United States, this farm­land. You could have all the farm­land in the United States, you could have about seven Exxon­Mo­biles, and you could have $1 tril­lion of walk­ing around money. And if you offered me the choice of look­ing at some 67-foot cube of gold and look­ing at it all day, you know, I mean touch­ing it and fondling it occa­sion­ally, you know, and then say­ing, you know, `Do some­thing for me,' and it says, `I don't do any­thing. I just stand here and look pretty.' And the alter­na­tive to that was to have all the farm­land of the coun­try, every­thing, cot­ton, corn, soy­beans, seven Exxon­Mo­biles. Just think of that. Add $1 tril­lion of walk­ing around money. I, you know, maybe call me crazy but I'll take the farm­land and the ExxonMobiles.

BECKY: All right, that makes sense.  Carl, you've got a ques­tion, too?

CARL: I'm still try­ing to get the image of War­ren fondling a giant block of gold out of my mind.

JOE: Yeah, and his fondling it occa­sion­ally was what stuck with me.

BUFFETT: Well, bring me a giant— bring me a giant block— bring me a giant block of gold and you'll see me fon­dle like you've never seen before.

CARL: War­ren, one ques­tion about— my favorite line in your let­ter, and I'm guess­ing everybody's favorite line is about your ele­phant gun being reloaded and that your trig­ger fin­ger is itchy...

BUFFETT: Yeah.

CARL: ...teas­ing some investors, as some said, about your appetite for acqui­si­tions. One of the— one of the imme­di­ate follow-ups for a lot of investors is, `Well, if he's so ready what's hold­ing him back?' And with the cash lev­els that you have, some read into that, that at these lev­els, these mul­ti­ples, Buffett's sim­ply not inter­ested. He wants things to really go on sale. Is that a coded mes­sage that you think stocks need to come down in order for you to buy?

BUFFETT: No, but it makes it eas­ier if they would come by— come down. But it— we're look­ing— you know, as I said, we're look­ing for ele­phants. Well, for one thing, there aren't very many ele­phants out there, and all of the ele­phants don't want to go in my zoo either, you know. So I have to find an ele­phant that thinks being in the Omaha zoo is, you know, the great­est thing there is in life, which of course it is. And then I have to have a fea­si­ble price for it, and obvi­ously, the lower stock prices are, gen­er­ally the more chance of that hap­pen­ing will be.

But, you know, it's going to be rare that we're going to find some­thing sell­ing in the tens of bil­lions of dol­lars where I under­stand the busi­ness, where the man­age­ment wants to join up with Berk­shire, where the price makes the deal fea­si­ble. But it will hap­pen from time to time, and it'll hap­pen more often when stocks are depressed than where they're buoy­ant. But I don't— we are not— even though stocks have gone up close to dou­ble from where we were here two years ago, stocks were really cheap then, and we talked about it then. Now, that, you know, peo­ple were scared but they— stocks were cheap. They're not as cheap now as they were then. But com­pared to most assets, they look attrac­tive. And so it is not the level of the stock mar­ket that's scar­ing me off, it does make it more dif­fi­cult to make deals now than it would have been two years ago. But we only need one.

JOE: Do we— do we still have more time, Beck, or do we got to— do you know? For this...

BECKY: I know they want to go to a break in just a minute to come back, but we're going to con­tinue this con­ver­sa­tion because this is obvi­ously pretty fer­tile ground.

JOE: Yeah.

BECKY: A lot of our view­ers have ques­tions about this, and I know, Joe, Carl and I have quite a few ques­tions, too.

JOE: Yeah, I want to ask him just a quick— a follow-up, too, on...

BECKY: Yeah.

JOE: ...because, yeah, let's just wait and I'll ask him a follow-up to. Because you do get paid back with your invest­ments in dol­lars. And if those dol­lars are, you know, are going to be worth much less in the future then I fig­ure you must— you must fig­ure pol­i­cy­mak­ers are going to get it together even­tu­ally, War­ren, or else, you know, paper money's not going to be worth anything.

BUFFETT: Well, but that's true of— if you're— if you're trained to be a lawyer or you're trained to be on cable or any­thing else you're going to get paid in dol­lars. Now, the ques­tion is, if you have some­thing valu­able to offer even if the dol­lar gets worth less, you will retain earn­ing power that's com­men­su­rate with pur­chas­ing power.

JOE: Ooh.

BUFFETT: And if— I mean, Coca-Cola, the— in the year since I've— was born the dol­lar has depre­ci­ated 94 per­cent. I mean, it's 16-for-1 in terms of infla­tion. But if you owned Coca-Cola in 1930, you've still done pretty well. Or if you owned a lot of good busi­ness in 1930. Because they have the abil­ity to extract real earn­ings in terms of what they deliver to peo­ple. And your doc­tor is able to charge 16 times as much as in 1930 because his ser­vices are still as valu­able. So, as the cur­rency gets worth less, it does not make— it does not penal­ize the ser­vice or the good that is really needed by other peo­ple. The world adapts.

JOE: Hm.

BUFFETT: And that's why I like busi­nesses or I like my own earn­ing power as the best assets in a time of infla­tion. They really can't be taken away.

JOE: Hm.

BECKY: War­ren, you started talk­ing about how your— you've got an itchy trig­ger fin­ger. I even saw you kind of mov­ing your fin­ger around like you're ready to shoot some­thing. Do you have any irons in the fire right now?

BUFFETT: We had an iron in the fire that got taken out of the fire just a day or two ago, which did— a deal that did not— some­body else beat us out on it. And I've always got a gleam in my eye, you know. I'm always look­ing at the girl, but the girl may not be look­ing at me. I mean, that's my prob­lem. And we— but we will always have some­thing that is at least a very, very, very low pos­si­bil­ity; some­body that's talked to me and said, you know, `I'll see what my board things,' or who knows. But we cer­tainly have noth­ing that's a high prob­a­bil­ity at the— at the moment.

BECKY: Was this thing that you just talked about, the— this deal that was poten­tially there, was it a— an elephant?

BUFFETT: It was a— it was a— hm, maybe a zebra, you know. Sort of— I mean, it was big enough to fit a— to make the zoo more inter­est­ing, but it— but it wasn't one to cause, you know, new crowds to come out.

BECKY: OK. So it's not as big as Burling­ton Northern.

BUFFETT: No, no.

BECKY: But it was some­thing that was substantial.

BUFFETT: It was some­thing that caused my heart to beat faster.

BECKY: OK. We're going to talk a lot more about this because ever since you men­tioned that you have an itchy trig­ger fin­ger in your annual let­ter, it's got all kinds of peo­ple try­ing to spec­u­late, fig­ure out what you might be inter­ested in.

BUFFETT: Yeah. But I would say this, Becky. I've had an itchy trig­ger fin­ger all my life. I mean, I just, I got a free ad out of it in the annual report this year.

BECKY: OK. We'll talk more about that when we come back. Carl ..

CARL: OK, Beck, a lot more still to come with War­ren. What a great first 30 min­utes of the show.  Joe, you were say­ing it's like— it's like a les­son with Gra­ham and Dodd, right?

JOE: Right. I said that yesterday.

CARL: I mean, it's the basics of investing.

JOE: Some­one made me tweet. He's the clos­est thing to the liv­ing epit­ome of, like— and you can't argue with it. There's $60 bil­lion behind say­ing that.

CARL: The score­board doesn't lie.

JOE: The score­board doesn't lie, no.

CARL: Win­ning.

JOE: Right. Win­ning. He's a warlock.

CARL: Win­ning. He is a war­lock. He is a god.

JOE: He is a war­lock, and he likes to fon­dle gold occa­sion­ally, apparently.

CARL: When we come back, you asked for it, now Squawk is deliv­er­ing. Buf­fett answers your e-mails when we return live from Omaha.

BECKY QUICK: Wel­come back, every­body. This is a spe­cial edi­tion of SQUAWK BOX. We're live in Omaha with War­ren Buf­fett, who's taken the time to sit down with us today and not only answer our ques­tions, but also the ques­tions that you've been send­ing in as well. And, War­ren, we appre­ci­ate that. We got lots and lots of ques­tions that came in. Carl men­tioned that the prob­a­bly most intrigu­ing line of your let­ter was this idea that your ele­phant gun is loaded and you are ready, got an itchy trig­ger fin­ger. That's what sparked a lot of the ques­tions that came in. So do you mind if we play rapid fire real quickly with some of these questions?

BUFFETT: OK, go to it.

BECKY: All right, the first one, let's say, comes in from Miykael in Canada, who writes in, "With arti­cles men­tion­ing that you're look­ing for major acqui­si­tions, with the econ­omy favor­ing the low-cost seg­ment, wouldn't Fam­ily Dol­lar be an ideal fit?"

BUFFETT: Well, there are a lot of com­pa­nies that would be a fit at a price. It's eas­ier for us to buy busi­nesses that are pri­vately owned than ones that are trad­ing on the mar­ket because peo­ple— I don't care what the mar­ket price is in terms of what they're worth to us. But gen­er­ally speak­ing, peo­ple, in eval­u­at­ing merg­ers and acqui­si­tions, look at the pre­mium pay to the mar­ket price and decide whether that's a fair price or not. A fair price to us is one that— where we think we're going to get our money's worth in terms of future earn­ings, and I would say that we will gen­er­ally have more luck with pri­vate busi­nesses than pub­lic busi­nesses, although Burling­ton was a pub­lic com­pany, yeah.

BECKY: Mm-hmm.

BUFFETT: Most com­pa­nies— most good com­pa­nies sell at prices where if we were to pay a 20 per­cent pre­mium to mar­ket, I would not want to buy them.

BECKY: Right.

BUFFETT: I mean, if you look at 50 large com­pa­nies that would sort of fit the ele­phant cat­e­gory, if you add 20 per­cent to that price, I don't want to pay that for the busi­ness. There's a few excep­tions to that, but not very many.

BECKY: All right. Well, let's talk about a pri­vate com­pany. We had Whit­ney Tilson on our air ear­lier this week. He said he knows noth­ing, but it struck him that Mars might be an inter­est­ing company.

BUFFETT: Well, Mars is a won­der­ful busi­ness, and we're their part­ners in Wrigley. And if the Mars fam­ily were to ask me about sell­ing their busi­ness, I would say keep it.

BECKY: Mm-hmm.

BUFFETT: I mean, if you own a won­der­ful busi­ness in life, the best thing to do is keep it. All you're going to do is trade your won­der­ful busi­ness for a whole bunch of cash, which isn't as good as the busi­ness, and now you got the prob­lem of invest­ing in other busi­nesses, and you prob­a­bly paid a tax in between. So my advice to any­body who owns a won­der­ful busi­ness is keep it. Now, some­times there's a— some rea­son in terms of taxes or fam­ily sit­u­a­tions or what­ever it may be that a won­der­ful busi­ness is for sale. But I have told a num­ber of peo­ple who've come to me who have won­der­ful busi­nesses, if you can fig­ure out a way to keep it, keep it, because all you're going to do is take that bil­lion dol­lars you get, or 5 bil­lion, you're going to pay some tax on it, now you're going to go out and buy some stocks, and most of those stocks you buy are not as won­der­ful as the busi­ness that you already owned, and you don't know as much about it and, you know, so some­times it pays to know when you're well off.

BECKY: So why does any­body ever sell to you?

BUFFETT: Well, they sell because fam­i­lies sub­di­vide, pro­cre­ate or what­ever you want to call it, and some­times peo­ple lose inter­est in the busi­ness. We bought a com­pany called See's Candy, one of our very first pur­chases back in 1972. Mary See had sev­eral grand­chil­dren, and one of the grand­chil­dren— grand­sons was very inter­ested in run­ning the busi­ness, and one was less inter­ested. And the one that was inter­ested died, and the one that was less inter­ested then decided to sell. It's lots— there's human dynam­ics that enter into it. But you should never sell a good busi­ness just to get money. That does not make sense.

BECKY: OK, let's take a few more viewer ques­tions. This one's num­ber 96, and he— again, this is Paul in Thai­land, who wants to know, on this unload­ing the ele­phant gun, are you plan­ning to unload in the United States or out­side of the United States?

BUFFETT: Any­place I can buy. I can't afford to be picky. There are so few chances out there that, you know, four or five years ago I was very lucky because I got a let­ter from Israel about Iscar.

BECKY: Mm-hmm.

BUFFETT: And I'd never heard of the com­pany before, but I could tell it was our sort of busi­ness and our sort of man­age­ment. So I would hope to get another let­ter like that tomor­row, and I don't care whether it comes from the UK or Ger­many or France or wher­ever. It's more likely to be the United States than any other place. But we have cer­tainly not bought our last inter­na­tional company.

BECKY: Well, some­one else writes in— Ser­gio from Mex­ico, he wants to know, "Is there some rea­son not to use the ele­phant gun on the stock mar­ket? For instance, increas­ing Wells Fargo to the 10 per­cent limit, or buy­ing a lot more Wal-Mart?"

BUFFETT: Yeah. Well, we've done— in the last year we've done both of those things. We bought some more Wal-Mart, some more Wells Fargo.

BECKY: Mm-hmm.

BUFFETT: And I like those busi­nesses, and I like the prices at which they sell, and I like the man­age­ments. But if I had my choice, I would rather buy a big busi­ness if it's all our cri­te­rion. But we have 60-plus bil­lion in com­mon stocks, and those are pieces of busi­nesses that I like. And most of those busi­nesses— now, Wells Fargo we couldn't buy. We can't buy a bank. You know, Coca-Cola isn't going to sell out to us, Wal-Mart isn't going to sell out to us. So we would be very happy own­ing 100 per­cent of those busi­nesses at the prices at which they sell, or oth­er­wise I wouldn't buy the stock.

BECKY: OK. Roman from Pitts­burgh writes in, and I think I know the answer to this one, but he wants to know if you'd be inter­ested in pur­chas­ing more US-based rail­roads at the right price. You can't do that, right?

BUFFETT: That would be pretty tough, yeah. In fact, when we bought the BNSF, it wasn't actu­ally required by law, but we thought it was advis­able to sell our hold­ings in the Nor­folk South­ern and the Union Pacific. And that prob­a­bly cost me at least a bil­lion dol­lars. I liked those stocks. I mean, I knew those com­pa­nies were going to do well. And legally we didn't have to do it, but we thought that prob­a­bly was a good idea. And now I think it's a bad idea.

BECKY: But it's not a reflec­tion of your vision for the rest of these railroads?

BUFFETT: Oh, no, no. I thought— I would have— I would have bought more of those rail­roads. That— those— the rail­roads have a com­mon future. The big rail­roads in the United States have a com­mon future now. I like the ones in the West a lit­tle bit bet­ter than the East, but there are fun­da­men­tal rea­sons why rail­roads were going to do well, and— no, if I could be loaded with— at least at the prices of a year ago, if I could have been loaded with other rail­road stocks as well as buy the BNSF, I would have done it.

BECKY QUICK: Carl, you have a ques­tion, too?

CARL QUINTANILLA: I do, War­ren, and I hope you won't mind me again plumb­ing through the let­ter, which obvi­ously has a lot of infor­ma­tion and a lot of insight. You talk in one area about your man­agers and how they love to work at Berk­shire in part because they're not sub­jected to meet­ings at head­quar­ters, or— nor financ­ing wor­ries, nor Wall Street harass­ment. And I know you pick your words care­fully. Do you think bankers have been harassed, and do you sort of agree with what (JPMor­gan Chase CEO) Jamie Dimon said in Davos, that he's tired of hear­ing about blame being placed on, as he put it, bankers, bankers, bankers?

If I'm going to buy you out in order to ben­e­fit Joe and me, I want to tell you first that I think I'm buy­ing you out cheap. Now, if you still want to sell to me, you know, that's fine and you've been warned and— but the very act of me telling you that, par­tic­u­larly in a stock like Berk­shire, is prob­a­bly going to make the whole exer­cise self-defeating. It cer­tainly did a cou­ple of years ago. So it isn't much of a tool for us. I think it's a great thing to do if your stock is sell­ing well below intrin­sic value. Now, 40 years ago, most buy­backs— when Henry Sin­gle­ton was buy­ing back Tele­dyne, when Paul Getty was buy­ing back Tide­wa­ter Oil, all of those stocks, they were buy­ing them because they were cheap. They were buy­ing dol­lar bills for 60 cents. I would say that my expe­ri­ence with man­age­ments in the last 20 years is that they like buy­ing their stocks when they're high. They, you know, just look at the buy­backs that took place in 2006 and 2007 and then look at what those com­pa­nies were doing in 2008 and '9. They were not buy­ing back their stocks at a small frac­tion of what they'd been sell­ing for ear­lier. Man­age­ments— many man­age­ments just like the idea of hav­ing their stocks sell as high as they can, except when they're issu­ing options to them­selves, they like it low then, and the— my atti­tude is entirely dif­fer­ent. You buy your stock back when you think you're buy­ing it for less than it's worth, and you tell the peo­ple that you're buy­ing it from that that's the rea­son you're buy­ing it. If they want to sell it to you, then, you know, both sides benefit.

BECKY: OK. Joe.

JOE: Thanks, Beck. Hey, so War­ren, I'm sit­ting there think­ing about, there's more than one way to skin a cat, and I'll get some mail on that, I know, but I think about the way you do things and then, just for an exam­ple, I think about Ron Baron, and the way he has— he'll iden­tify some­thing, I don't know how the heck he does it, Apple or Net­flix, and then he'll ride that baby and it will turn into like a grand slam. And I don't usu­ally see you buy­ing First Solar or some bat­tery com­pany for lithium cars, I— you know, it's just not your thing. And I won­der whether that's because— I thought about it, if you get a sin­gle every time— and you love base­ball— if you get a sin­gle every time you're up at the plate, you— and you just keep get­ting sin­gles, you will score more runs than if you get a home run every four or five innings or some­thing. And maybe that's your atti­tude, but I think about what the gov­ern­ment tries to do in pick­ing these home runs, these alter­na­tive energy invest­ments, and you don't do it. And I won­der why is it that you do don't do it? You need a real busi­ness before you'll put your money down.

BUFFETT: Yeah, I'm not— I'm not smart enough, Joe. I have enough trou­ble see­ing the past; see­ing the future's really dif­fi­cult for me. So I can look at some­thing like Wrigley's chew­ing gum, you know, which started, I think, around 1892 or some­thing, or Coca-Cola, 1886, and if a prod­uct since 1886 has increased its per capita con­sump­tion every year for 124 years, almost, I, you know, I can fig­ure that one out. I'm not— I'm not good at pick­ing things for the future. Now, inter­est­ingly enough, the one com­pany that you might say I was rea­son­ably good at doing that at was GEICO, where I went there 60 years ago, I've got a 60-year pin here from a month ago. I had it explained to me by a remark­able man when I was 20 years old why GEICO had an extra­or­di­nary future, and the basic rea­sons he explained to me then are still oper­a­tive today. So that is some­thing, lit­er­ally, where we have rid­den out our own form of Ama­zon or Net­flix or what­ever it might be because I under­stood the rea­son why they had a fun­da­men­tal advan­tage which would last for­ever. The com­peti­tors would not fig­ure out how to take it away from us. But that's a hard thing for me to fig­ure out about some new prod­uct. I mean, you know, Becky could show me some instru­ment she's car­ry­ing around that, you know, keeps her in touch...

BECKY: Not me. Maybe Carl.

BUFFETT: Well, maybe Carl, but it keeps her in con­stant touch with, you know, Carl and you. I'm not sure why she'd want to, but that's another ques­tion. The— and— but I won't— I won't under— I won't under­stand it, you know. But I can under­stand why peo­ple drink Coca-Cola and I can under­stand why they chew gum and I can under­stand why they insure with GEICO. And so I am lim­ited by the things I can under­stand. And I under­stand things that hap­pened in the past and which ones are likely to repeat and which ones are hula hoops or pet rocks. I can— I can make those deci­sions rea­son­ably well. I am not good at lis­ten­ing to 20 guys who've got great new ideas about things that are going to change the future...

JOE: Well...

BUFFETT: ...and fig­ur­ing out which one of the 20 is right.

JOE: But I wasn't headed to a polit­i­cal ques­tion, but I just— if you can't do it, that's why I just won­der whether assets are well-spent by a gov­ern­ment try­ing to decide what the next— what's going to power the world 10 or 15 or 20 years from now. That was my point. If you can't do it, why do they think they can do it?

BUFFETT: Well, you're in charge of pol­i­tics this hour, Joe, so I'll let you make that point.

JOE: Yeah.

CARL: You...

BUFFETT: But, no, I share some of your doubts, I share some of your doubts, Joe.

JOE: You dip your toe— you dip your toe into it. I'm going to get you going, believe me. We've got three hours.

BUFFETT: I can go to it.

JOE: You signed on for it.

BUFFETT: Yeah.

JOE: I'm going to get you going on some of this stuff because you are...

BUFFETT: OK.

JOE: You are as...

BUFFETT: I've been warned.

JOE: You are— you are as die-hard a cap­i­tal­ist is any­one on the planet, and in some, you know, I— some peo­ple use you— you're used by both sides of the polit­i­cal aisle to move the, you know, to prove a point, so.

BUFFETT: Hm.

JOE: I know you know that.

BUFFETT: OK.

JOE: All right.

BUFFETT: I've been warned.

CARL: We'll come back to you guys in a lit­tle bit. Of course, War­ren and Becky talk­ing there in Omaha with us this morning.

CARL: Speak­ing of cars, some­one who knows an awful lot about that busi­ness from mul­ti­ple direc­tions, Becky, is the man who's with you this morn­ing, War­ren, in Omaha.

BECKY: That's right. In fact, he was glad to hear Mike Jack­son just talk­ing.  He said this is impor­tant and he'd like to talk about it.   What are you thinking?

BUFFETT: Well, it— what Mike talked about is— gets back to that regen­er­a­tive capac­ity of cap­i­tal­ism. We were sort­ing out 16 mil­lion cars a year not so many years ago. When it fell to nine and frac­tion mil­lion, when peo­ple were pan­icked, it was going to come back from that. We were— the scrap­page rate was higher. Amer­i­cans haven't lost their love affair with cars. More Amer­i­cans were going to be in the coun­try every year. So now it's back to, is— I think he said 12.4 or some­thing like that in February.

BECKY: Mm-hmm.

BUFFETT: And it's going to come back beyond that. I mean, it— well beyond that. And that really isn't a func­tion of say­ing cash for clunk­ers or isn't a func­tion of mon­e­tary pol­icy or fis­cal pol­icy, it's a— it's a func­tion of the fact that Mike is out there try­ing to fig­ure out ways to sell more cars, peo­ple want to buy more cars, money is cheap, the econ­omy is com­ing back, and it feeds on itself over time. And you will see 12.4 look like a very low num­ber in a— in a few years.

BECKY: Mm-hmm.

BUFFETT: And that is hap­pen­ing through­out Amer­ica. It hap­pens in dif­fer­ent places at dif­fer­ent times. It hasn't hap­pened in homes yet because there was a big­ger sur­plus to clean out. But in the case of cars, you can post­pone it a day or a week or a month buy­ing it, but scrap­page rates count over time.

BECKY: Sure.

BUFFETT: And there is a nor­mal num­ber of cars on the road for a given pop­u­la­tion in a place like the United States, and we fell below that for a while and now we're com­ing back, and we're going to keep com­ing back.

BECKY: Some­body just wrote in, wanted to know if you'd be inter­ested in buy­ing Auto Nation.

BUFFETT: Well, it's a good business.

BECKY: Yeah.

BUFFETT: It's a good business.

BECKY: All right. Warren's going be with us again for the rest of the pro­gram. We've got a lot more to talk about and a lot more of your ques­tions to get to. Our con­ver­sa­tion is just get­ting started this morn­ing. More on the econ­omy, pol­i­tics and the best invest­ment bets right now. Again, much more from War­ren Buf­fett, Squawk Box will be right back.

***

CARL: Wel­come back to Squawk here on CNBC. I'm Carl Quin­tanilla along with Joe Ker­nen; Becky Quick this morn­ing is at the Durham Museum in Omaha, Nebraska, with the Ora­cle of Omaha, War­ren Buf­fett, who's with us for the entire show. We've already got­ten one hour down, Joseph. You look like you've learned a lot already.

JOE: Yes. I've learned a lot and I've got–and I'm...

CARL: Your ele­phant gun is loaded with ques­tions still.

JOE: Yeah. Yeah, it...

CARL: And your–and your...

JOE: Or do I just like you? I–and I'm crav­ing more–I have more questions...

CARL: Yeah.

JOE: ...and I'm crav­ing more answers.

CARL: We've got­ten a lot so far.

JOE: Right.

CARL: We'll get to Becky and War­ren in just a minute.

***

CARL: Want to get back to Omaha, where Becky is this morn­ing, field­ing ques­tions not just from her­self and Joe and me, but from view­ers. How many–how many ques­tions do you think, Becky, we've got­ten total?

BECKY: Oh, thou­sands of them at this point, and I know they're still com­ing in fast and furi­ous this morn­ing. We're try­ing to go through those ones this morn­ing as they're com­ing in. But we got some really thought­ful ques­tions. This is the fourth year in a row that we've sat down with the Ora­cle of Omaha and talked to him about that annual let­ter just after it's come out. This time, though, we did it a lit­tle dif­fer­ently. We're here on a Wednes­day instead of a Mon­day. And, War­ren, that actu­ally gave the share­hold­ers and the view­ers a lot more time to go through this let­ter and come up with some pretty thought­ful ques­tions. So we want to work in as many of these as we can today.

BUFFETT: We may have to go back to the old sys­tem, I think. They're tougher.

BECKY: These are tougher ques­tions. One thing I do want to bring up, though, from the annual let­ter. You wrote about how cap­i­tal spend­ing at Berk­shire is going to be up above $7 bil­lion this year.

BUFFETT: Yeah, eight bil­lion. Yeah.

BECKY: And that's–and more than a bil­lion dol­lars above where it was last year.

BUFFETT: Yeah.

BECKY: So the–that's some pretty sig­nif­i­cant spend­ing. You also said that all that spend­ing is going to be tak­ing place right here in America.

BUFFETT: Yeah. We spent about six bil­lion last year, 90 per­cent of which was in Amer­ica, 5.4 billion.

BECKY: Mm-hmm.

BUFFETT: This year it'll be up two bil­lion, roughly, to eight bil­lion, and all of that increase will be in this coun­try. We–there are plenty of things to do in the United States that make–that make good eco­nomic sense. And, you know, we've got the money to do it and it–particularly true in our capital-intensive busi­nesses like the rail­road and I–like our util­ity busi­nesses. But we're spend­ing money in the res­i­den­tial home con­struc­tion busi­ness not because we see the orders today, but it takes time to build a plant for Johns Manville and, like, we want a brick plant in Alabama. That brick plant's going to lose money this month, it's going to lose money next month, it'll lose money the month after. But we are buy­ing the ninth largest brick pro­ducer, and we know that one year, two years, five years from now peo­ple are going to be using a lot of brick in houses. And we could buy it at an advan­ta­geous price, so we're...

BECKY: You think that that's a gen­eral sense in busi­ness right now? Because Jack Welch was with us yes­ter­day, and he pointed out that in the busi­nesses he knows–at Hertz, for exam­ple, if you look at the S&P 100 com­pa­nies, the spend­ing with Hertz that they're doing is up 15 per­cent from a year ago. If you look at the S&P 1000, it's only up by 6 per­cent. And if you look at the S&P 2000, it's only up by 2 per­cent. Do you get that same sense of this grad­u­ated con­fi­dence about the econ­omy, depend­ing on how big the busi­ness is?

BUFFETT: Well, I think it's more what you're see­ing in your own indus­try. Men...

BECKY: Mm-hmm.

BUFFETT: But we aren't see­ing it in res­i­den­tial homes. And I mean–or I'm not buy­ing a brick plant because I see a demand for brick next month.

BECKY: Mm-hmm.

BUFFETT: But this coun­try used 10 bil­lion brick a year five years ago when we were build­ing a cou­ple mil­lion homes, we're using about three bil­lion brick a year. But it isn't because peo­ple have lost their inter­est in brick or its util­ity or any­thing has changed, it's just res­i­den­tial construction's down a lot. But that's not going to hap­pen for­ever. And a brick plant is going to be more costly to con­struct five years from now than now. So if we're get­ting some­thing that's state of the art, you know, now's the time to buy it if you've got the money. And we've got the money.

BECKY: Well, let's talk about a big announce­ment that just came out late last night, Net­Jets is going to be buy­ing, it looks like, 50 global busi­ness jets val­ued at about $2.8 bil­lion dol­lars from Bom­bardier, and you've got options for another 70 global air­craft. If you buy all these, it's going to be retail price exceed­ing $6.7 bil­lion, and that'd be the largest air­craft pur­chase in the his­tory of pri­vate aviation.

BUFFETT: That's true. Yeah. We–and we did the same thing in small cabin air­craft with Embraer some months ago. So we have com­mit­ted in two of the three cat­e­gories, they're still the mid­cap, and–but we've com­mit­ted huge amounts in the antic­i­pa­tion of demand that occurs over the next 10 years. Now, you don't build planes overnight, you don't get demand for them overnight. But there will be an increase in gen­eral avi­a­tion over the next decade, and we have–we think this is a good time to make those com­mit­ments. We can make a com­mit­ment bet­ter now than when the peo­ple are sell­ing planes by the–by the–by the buck­et­load. So there will be–there's some antic­i­pa­tory activ­ity that we engage in, and some com­pa­nies may not do that. They may not have the money to do it. But as demand comes on, you will see–you're going to see a pick-up this year. And those fig­ures you quoted about cap­i­tal expen­di­tures, my guess is that that expands as the year goes along.

BECKY: Right.

BUFFETT: I mean, people–a lot of peo­ple don't respond–and you can under­stand it–until the order comes in the door. But as busi­ness picks up, every­body wants to start play­ing again.

BECKY: Right. Joe:

JOE: Yeah. Oh, I'm just–I'm not going to–not even going to make the com­ment that he's not invest­ing a lot in any high-speed rail com­pany. But never mind. Not that–that's neither...

BUFFETT: Our trains–our trains–our trains go pretty fast, Joe.

JOE: But–I know. I know. Not that–that's nei­ther here nor there. But avi­a­tion does have a pretty good–that's a bet­ter way to–you know, if you're going to go between Fargo and Mil­wau­kee, Carl, you don't need to get on a high-speed rail, right?

CARL: How about Tampa-Fort Lauderdale?

JOE: No! No! No! You do not!

CARL: Now, that's just cry­ing out for high rail.

JOE: You do not! Hey, I didn't hear your...

BUFFETT: Joe, let me get...

JOE: Go ahead.

BUFFETT: Joe, let me give you an inter­est­ing fig–let me give you an inter­est­ing fig­ure. The 800-and-some miles of rail they're talk­ing about in Cal­i­for­nia, high-speed rail, I think they've talked about a cost of 43 bil­lion for that. We bought the Burling­ton with 23,000 miles of main route rail­road and tens of thou­sands in sid­ings and all of that, 6,000-plus loco­mo­tives, how many cars I don't know, tun­nels, bridges–we bought the whole thing, count­ing debt, for about 43 bil­lion. So as you can see, there's–it's pretty expen­sive to build that stuff.

JOE: Don't–I under­stand. It almost sounds like you're agree­ing with me. I don't want–I don't want that. Hey. I didn't hear your answer on Auto Nation, War­ren, because they were in our ear. Do–you say that's a pretty good busi­ness? Is that–did you...

BUFFETT: Yeah.

JOE: Yeah?

BUFFETT: Yeah, my impression–I don't know it in detail, but my impres­sion is that's a pretty good business.

JOE: Becky, did Mike Jack­son sign that e-mail, or did he–what...

BECKY: No. It actu­ally came from–it actu­ally came from some­body in our–in–our Wash­ing­ton bureau chief.

JOE: Oh. Oh, oh. I thought he wrote in, do you want to buy...

CARL: Because Mike is in Wash­ing­ton today.

JOE: Yeah. I thought it was signed, `Do you want to buy Auto Nation?' signed Mike Jackson.

CARL: Right.

JOE: Which would have been...

BECKY: No, no, no.

JOE: That–oh, OK. All right.

BUFFETT: No. I would...

JOE: Never mind.

BUFFETT: I would–I would have–I would have sent a car for him if it did.

JOE: Hey, the other thing I was think­ing, War­ren, I love the phrase "morn­ing in Amer­ica" and "America's best days are ahead," and you say that all the time. And I–you fer­vently believe it, I fer­vently believe it. I'm won­der­ing whether you think Amer­i­can excep­tion­al­ism is real, or whether cap­i­tal­ism and the way we prac­tice it here imbues Amer­ica with that excep­tion­al­ism. Is it us, or is it the sys­tem itself?

BUFFETT: It's–well, it's over­whelm­ingly the sys­tem itself because human beings had desires to live bet­ter lives three or four or 500 years ago, and they were natively intel­li­gent and they worked like hell, they worked harder than we did. So there's always been the human input, but the out­put really wasn't com­men­su­rate with, you know, the qual­ity and the inten­sity of the input. And then a sys­tem came along in the United States which, to a sig­nif­i­cant extent, believed in a rule of law, it believed in the rule of the mar­ket­place, it believed in equal­ity of opportunity–none of these were per­fect, but that sys­tem unleashed human poten­tial like never before. And now what you've seen is you've seen other coun­tries around the world in their own way copy it to some degree. And they haven't had to get smarter in a native sense, they haven't had to work harder. They've sim­ply had to have some­thing that let a 500-horsepower motor in the human body churn out some­thing like 500 horse­power instead of only turn­ing out 50 horse­power like it did for millennia.

JOE: But are we declining–is it morn­ing in China? Is it–is it–is it mid­day here?

BUFFETT: Yeah. It's morn­ing in China, but it's morn­ing in Amer­ica. I mean, China will grow faster than we're grow­ing, obvi­ously, because they're com­ing from a lower base. And that'll be true of other coun­tries around the world. But the fact that we can't–you know, it's a lit­tle prob­lem I have with Berk­shire. I can't–I can't grow Berk­shire with a $200 bil­lion mar­ket value the same way–at the same per­cent­age rate as I could when it was a few hun­dred mil­lion. But it can still be plenty sat­is­fac­tory. It–the per­cent­ages can't be as great. And the United States can­not grow at the same rate as a China can, but they start from a far, far lower base. And we ought to be happy that they're doing well. It's not a zero sum game in the world. We do not want to be an island of pros­per­ity in–among seven bil­lion peo­ple, and have 300 bil­lion peo­ple doing very well here and have the rest of the world in–you know, in squalor because that's not a good idea under any cir­cum­stances, it's prob­a­bly not a good idea as a human­i­tar­ian. But beyond that, it's not a good idea when some of these other guys have nuclear weapons.

BECKY: You know, real quickly, on that point, War­ren, we got a ques­tion from a viewer, Ivan in Germantown–I don't know if that's Ger­man­town, Wis­con­sin. He wrote in, "How con­cerned are you about the pos­si­bil­ity of the dol­lar los­ing its sta­tus as the world's reserve cur­rency? And how rapid and how severe would you expect the impact of such a change to be?"

BUFFETT: Yeah. Well, the dol­lar will become less impor­tant over time because the–America's dom­i­nance of the world eco­nomic sys­tem will dimin­ish. It doesn't mean we aren't going to be the lead­ing player 25 years from now, we will be. But what–this over­whelm­ing dom­i­nance that we've–post-World War II that we–that we've exhib­ited through­out the world, other coun­tries have caught on to some degree. And, like I say, we should be glad they've caught on. Their peo­ple are going to live bet­ter because they've caught on. You know, it–the peo­ple in China are not smarter than they were 50 years ago natively, they are not work­ing harder. But they have learned how to unleash their poten­tial, and it's a mar­velous thing. But the United States is the exam­ple to the world.

BECKY: OK. Carl:

CARL: Just stick­ing with the China theme, War­ren, we–everybody's watched you with BYD and try­ing to gauge your expe­ri­ence in doing busi­ness over there. What's the biggest les­son you've learned about Chi­nese cul­ture when it comes to busi­ness, and what is your response to those who really see a prop­erty bub­ble in China that will–that will end in tears at some point down the road?

BUFFETT: Well, yeah, I don't know about their spe­cific mar­kets. I mean, almost any company–any coun­try that flour­ishes over time will have hic­cups, and some­times major hic­cups. I mean, look at the United States. We've prob­a­bly had 15 reces­sions since the coun­try was formed, and we've had–you know, we had a very major one here in the last few years with all of our devel­op­ment of think­ing we know all about eco­nom­ics and all that. So any–countries are going to have hic­cups. The main thing is whether they go totally off the rails or not.

But if you look at China and you look at the phys­i­cal assets that have been put together in the last few decades, I mean, it just blows your mind to look at the roads and the tun­nels and the rail­roads and the build­ings. All of that's been put together. And at the same time, they have accu­mu­lated 2.7 tril­lion of reserves on the rest of the world. Now, think about the United States. When we were build­ing the United States, build­ing the rail­roads and–right here in this area where I am, we were bor­row­ing money from Europe to do that. It was the smartest thing we ever could do to build cap­i­tal invest­ment here, bor­row the money and then pay them back later as we became more pro­duc­tive. But in the case of China, they have built this incred­i­ble amount of wealth, and they have not done it with bor­rowed money, they have done it while build­ing up 2.7 tril­lion more than any coun­try in the world in terms of claims on the rest of the world. So it's a remark­able sit­u­a­tion. Now, it–whether they have booms and busts in their stock mar­ket or their real estate mar­ket, I'd be amazed if they didn't. I mean, every devel­oped coun­try that's, you know, whether it's Ger­many, whether it's the United States, whether it's the UK, whether it's Japan, we've all have sig­nif­i­cant ups and downs. But if you look at where we are com­pared to 50 years ago or 100 years ago or 200 years ago, there's really been noth­ing like it in the his­tory of mankind.

BECKY: War­ren, we've got a cou­ple of viewer ques­tions, actu­ally sev­eral of them, but I want to bring two up right now about BYD...

BUFFETT: Mm-hmm.

BECKY: ...since Carl men­tioned this in his intro­duc­tion to that ques­tion. Ray from West­min­ster, Mary­land, writes in. He says, "Every­one seems to be aware of your invest­ment at BYD–that's the Chi­nese elec­tric car com­pany. The stock's dete­ri­o­rated of late and I can't seem to get a han­dle on the firm's prof­itabil­ity. Are they try­ing to com­pete on pric­ing only, or does their bat­tery tech­nol­ogy give them a clear advantage?"

BUFFETT: Well, the bat­tery tech­nol­ogy, if it works out like they hope it will, will give them a clear advan­tage. But bat­tery tech­nol­ogy is a evolv­ing and tough game. And my part­ner Char­lie par­tic­u­larly thinks that we've got the right fel­low to make the break­throughs in that–in that area. But it isn't like you get it tomor­row or the next day. And, you know, there are a lot of smart peo­ple work­ing on bat­tery tech­nol­ogy. And, you know, I–in the–in the end, what I hope is the world gets a great answer on it very quickly...

BECKY: Mm-hmm.

BUFFETT: ...and if it says–if it says "made in Japan," "made in China," "made in the United States," the impor­tant thing for human­ity is that–is that we get great bat­tery tech­nol­ogy. Now, like I say, my–Wang Chuanfu is an amaz­ing guy. I'm impressed with him.

BECKY: The gen­tle­man who heads BYD.

BUFFETT: Who runs BYD.

BECKY: Right.

BUFFETT: And my friend, Char­lie, who knows a lot more about bat­ter­ies than I do, thinks that this guy is the sec­ond com­ing, more or less. So we'll see what hap­pens on that. It's not easy. I mean, when you're deal­ing with bat­ter­ies, you know, the weight, the cost, there's all–there are plenty of prob­lems involved, but I will bet sig­nif­i­cant progress is made by BYD, but there may be more sig­nif­i­cant progress made by some­body else in the next few years.

BECKY: Tony in San Diego writes in and says that, "BYD has lost more than 60 per­cent from its peak in 2010. Do you con­sider buy­ing more shares because of the cur­rent discount?"

BUFFETT: No. Well, who knows?

BECKY: OK.

BUFFETT: With the one thing I–you know, you can talk about every­thing in my life vir­tu­ally except for what we're buy­ing or selling.

BECKY: OK. So that's a nonanswer.

BUFFETT: Yeah.

BECKY: But, Joe, you've got another ques­tion, too.

JOE: All right, we'll always have–always have more. War­ren, I'm try­ing to fig­ure out whether you–we're–since we're on the sub­ject of energy, it's fas­ci­nat­ing how we're going to do this as we need more and more. And are you going to play it through util­i­ties and not really think about what the input is for the–for the energy it's going to come from? You're not–you're not smart enough to fig­ure that out, or...

BUFFETT: You've got it. You got it. I'm not–I mean, I'm not good at that. I got through physics OK in col­lege, but that's just because I mem­o­rized the for­mu­las. I really never knew why when you, you know, turned a lit­tle switch lights went on or the tele­vi­sion went on. And I still don't know. So I do not have a mind that really has any spe­cial abil­i­ties at all, in terms of things phys­i­cal. So I leave that to oth­ers, and I–you know, I just try and fig­ure out whether peo­ple are likely to drink more Coca-Cola next year than last year.

JOE: But...

BUFFETT: And I can under–I can under­stand certain–I mean, I can under­stand if you're the low-cost guy in auto insur­ance that–and peo­ple have to buy it, that you're going to do very well over time. But I am not good at insights about the future prod­ucts. And I do not sit and try and fig­ure out trends or any of that sort of thing. And I don't–and I don't pay any atten­tion to peo­ple that talk about them because I don't–I don't know enough to eval­u­ate them myself.

JOE: Yeah, but util­i­ties are going to be there deliv­er­ing what­ever it is that gen­er­ates the energy.

BUFFETT: Sure.

JOE: And so that's your–that's the way you're going to par­tic­i­pate in that.

BUFFETT: Yeah.

JOE: Because you have...

BUFFETT: Yeah, they're...

JOE: ...you haven't bought natural...

BUFFETT: They're fundamental.

JOE: You haven't really bought nat­ural gas or oil in the ground or–typically, right?

BUFFETT: Not very often, no. And, you know, it–I don't know–the oil pic­ture five years from now will be to, you know, may be much more depen­dent on pol­i­tics than whether I can pick the best geol­o­gist in the United States. And, you know, I know we'll be using more nat­ural gas, I know it's got all kinds of advan­tages and it's cheap on a BTU equiv­a­lent to oil and it's cleaner and all kinds of things. But in the end the price depends on sup­ply and demand. And even though demand will go up some, I don't know whether supply's going to go up even faster than that. And so far it's been–the last few years I should say that, you know, nat­ural gas has been pretty dis­ap­point­ing. It hasn't been dis­ap­point­ing in terms of find­ing it, hasn't been dis­ap­point­ing in terms of its per­for­mance, it's just been–there's been too much of it around. And I don't know–I'm not good at fig­ur­ing out, you know, whether that will change a year from now, or five years from now, and I'm not in that game.

CARL: I do like your point, though, about bat­ter­ies. And a big–it's a tough hill to storm, but if you could–if you could take that hill and turn bat­ter­ies into some­thing other than what they are today, that has impli­ca­tions for solar, cer­tainly for BYD. Would you say, War­ren, that battery–the evo­lu­tion of bat­ter­ies is where you are most lever­aged to inno­va­tion and tech?

BUFFETT: Well, per­haps. And, Carl, you're 100 per­cent right. I mean, it–and it's going to hap­pen. It may hap­pen at BYD, it may hap­pen, you know, with Gen­eral Motors, it may hap­pen in Japan. Lots of smart peo­ple are work­ing on it, and you know it's a tough prob­lem because you're got to many smart peo­ple and it is prov­ing tough to get accom­plished, but it's going to hap­pen. It will hap­pen. And I'm not the kind of a guy nor­mally that makes a bet on who's going to make it hap­pen. I'm just not that–I'm not that good at pick­ing the win­ner in some­thing like that. I know who's going to win in soft drinks, I know who's going to win in chew­ing gum, you know, I know who's going to win in auto insur­ance. But that doesn't really take any great insights. My part­ner, Char­lie Munger, believes very strongly that BYD is the most likely win­ner in this. He's got a–and he is a lot smarter than I am on this sub­ject and a lot of other sub­jects. But that doesn't mean I'd shove all my chips out in the table just because Char­lie feels that way.

BECKY: Hey, War­ren, before we go to a break, I do want to ask you about one more head­line that came out yes­ter­day and that does con­cern Berk­shire in a very offhanded way. There's a gen­tle­man named Rajat Gupta...

BUFFETT: Right.

BECKY: ...who was on the board at Gold­man Sachs. Appar­ently he tipped off Raj Rajarat­nam about your invest­ment in Gold­man Sachs, that it was com­ing, that big invest­ment dur­ing the finan­cial cri­sis. And Rajarat­nam made about 900,000 to $1 mil­lion on that trade. The big­ger question–I'm assum­ing you knew noth­ing about that...

BUFFETT: No, no.

BECKY: ...but the big­ger ques­tion is, how fre­quently do you think things like this happened?

BUFFETT: Well, I think they've hap­pened, you know, I've got no idea in the sense of any–but they hap­pen. And one of the things I feel the best about is that, in all of the Berk­shire acqui­si­tions we've made, I mean, whether it was Dairy Queen or Flight Safety or Burling­ton North­ern or you name it, or when Disney–when we acquired ABC and then when Dis­ney acquired ABC, if you take the whole record of all the ones that Berkshire's directly involved in, the stocks of the acquired com­pany have actu­ally under­per­formed in the week before the announce­ment. Now, we make a point of try­ing to get deals done fast. I mean, and when we did Burling­ton, it was from a Fri­day when I made an offer that Matt Rose con­veyed to his direc­tors, and I told them that I wanted a con­tract by the fol­low­ing Sun­day and I wanted to be able to announce it on Mon­day morn­ing because I–if enough time goes by and enough peo­ple get exposed to it, somebody's going to talk. And so far at Berk­shire we've been able to do that, but it always wor­ries me because this–as–and when a deal starts out, the cir­cle enlarges and who knows about. That Gold­man deal, for example.

BECKY: Mm-hmm.

BUFFETT: The time between when I said I would do that deal and when it was announced was very, very, very short.

BECKY: How short?

BUFFETT: Oh, it was, you know, hours. I mean, and as opposed to a merger or some­thing that might take a cou­ple of weeks. But it's alleged, I think, that the fel­low heard about it and then went right out and made a phone call. I mean, if they're going to do that, you know, you're going to have–you're going to have a prob­lem. And I would say that, you know, it's all kind of–just what you hear from other peo­ple, but there's been a fair amount of trad­ing on inside infor­ma­tion, I think, in Wall Street. There's money in it, you know, and it's tempt­ing to people.

BECKY: Hm.

BUFFETT: It could be a sec­re­tary in a law firm, it can be a–it can be some­body at a printer. I mean, it's–there's just–you can't make a deal with­out a cer­tain num­ber of peo­ple hear­ing about it. Now, at Berk­shire, you know, I don't even tell the direc­tors. I mean, I–Mark Ham­burg, our CFO, knows about it if I'm work­ing on some­thing. Char­lie may know about it. But I just–I'm para­noid about the idea that if we have 20 peo­ple that know about some­thing, you know, one of them's going to tell some­body. And they may do it not even to make money or any­thing like that, they may do it just to show off that they, you know, that they got all this knowl­edge or some­thing of the sort.

BECKY: Mm-hmm. OK. Well, again, War­ren, thank you very much. And we're going to con­tinue this con­ver­sa­tion in just a moment. Carl:

CARL: All right, Beck. When we come back, a lot more form War­ren and Becky in Omaha. By the way, if you still want to e-mail us, you can today. It's askwarren@cnbc.com. We'll answer some of your ques­tions right after the break

BECKY: Wel­come back to SQUAWK BOX here on CNBC. We are in Omaha, Nebraska, this morn­ing at the Durham Museum with War­ren Buf­fett. We're going to be answer­ing some of your e-mail ques­tions. And, War­ren, just again for peo­ple who are com­ing in late, we're in the Durham Museum in front of the Ernest Buf­fett Gro­cery Store. And this is pretty impor­tant to you.

BUFFETT: Yeah. That store was founded my–founded by my great-grandfather, Sidney...

BECKY: Mm-hmm.

BUFFETT: ...in 1869, which is when the transcon­ti­nen­tal rail­road was com­pleted. That's when the UP hooked up with the Cen­tral Pacific at Promon­tory Point, Utah. And my grand­fa­ther had two sons that worked with him, Ernest and Frank, and unfor­tu­nately they both fell in love with the same woman at the store. So she mar­ried my grand­fa­ther, and for about 20 or 30 years Frank didn't speak to him and opened up another gro­cery store, but not that we carry grudges in the Buf­fett fam­ily. But Char­lie Munger and I ended up work­ing there.

BECKY: Yeah.

BUFFETT: He worked there in the late 1930s, I worked there around 1940, and we never knew each other. But we did have this expe­ri­ence of work­ing for my grand­fa­ther, which, believe me was an expe­ri­ence. He believes in hard work.

BECKY: Yeah, you wrote about that in the annual let­ter, as well, and said that the thing that you learned com­ing out of that is the impor­tance of liq­uid­ity and not get­ting overleveraged.

BUFFETT: Yeah. My grand­fa­ther left–gave $1,000 even­tu­ally, at 10 years after the mar­riage of each of his chil­dren and my aunt didn't marry, but he gave her $1,000 as well and he sent them this let­ter and he said, `Put this money away.' He said, `Don't get tempted to invest it because some day you may need money and who knows what you're can do with your invest­ment then.' So you'll always want to have some cash. He gave me a $2 bill when I was a kid and he said carry this around and he said you'll, you know, you'll never be broke.

BECKY: Now Berk­shire has how much in cash?

BUFFETT: Well, we prob­a­bly have about–I think we had about 38 bil­lion at the end of the year, so.

BECKY: It's a les­son you took to heart.

BUFFETT: Yeah. He would be happy.

BECKY: OK. Let's get to some of the viewer e-mails and a sig­nif­i­cant num­ber of those e-mails that came in had to do with Berkshire's invest­ments. You spent a lot of time talk­ing about that in your annual let­ter. But one that came in from J.P. in Delaware says that "Given that Wells Fargo is your second-largest equity hold­ing, how con­cerned are you with the res­ig­na­tion of the CFO and the man­ner in which the com­pany dis­closed this?"

BUFFETT: Yeah, I don't think the man­ner in which they dis­closed it was very good. The–but Howard Atkins was a ter­rific CEO or CFO.

BECKY: CFO, yeah.

BUFFETT: And you know, I didn't know him per­son­ally, I never met him per­son­ally, but I–but I watched him on tele­vi­sion, I saw what he wrote and every­thing. It has noth­ing to do with their financials.

BECKY: Mm-hmm.

BUFFETT: I spent about four hours last Sat­ur­day read­ing the 10-K and I feel very good about the whole Wells oper­a­tion. Obvi­ously, there's some­thing there beyond what was in the news release and it's a tough thing. If you've got some­thing that nei­ther side wants to talk about, they're not going to talk about it. And I don't–I don't know the answer myself. I know it has noth­ing to do with finan­cials, though, and...

BECKY: That was another viewer ques­tion that came in from Clif in Alabama.

BUFFETT: Yeah. Nothing.

BECKY: That–there was at least one ana­lyst who wrote that this did have some­thing to do with that.

BUFFETT: Yeah.

BECKY: You are 100 per­cent con­vinced it did not?

BUFFETT: I'd bet a lot of money that he's wrong.

BECKY: OK. That's one of many ques­tions that have come in, but we also have ques­tions that have come in about Moody's. Achit in Ari­zona writes in, "In your FCIC inter­view, you spoke of the inher­ent advan­tages of a duop­oly that Moody's and S&P share. Why does Berk­shire con­tinue to reduce its inter­est in Moody's? Is there too much head­line risk" for you? BUFFETT: Well, I think that duop­oly is in some­what more dan­ger than it was sim­ply because peo­ple are mad at the rat­ings agen­cies and the rat­ings agen­cies totally missed what was going on in the mort­gage mar­ket and that was a huge, huge miss. I don't think they were, you know–I think they were just wrong, like a lot of peo­ple were wrong about in think­ing that hous­ing prices couldn't go down a lot, but they were rat­ing agen­cies and they've got­ten a lot of crit­i­cism for it and their busi­ness model is sen­sa­tional when it's a duop­oly. I mean, I have no bar­gain­ing power. I'm going to see Moody's in the week or I think or some­thing about our ratings.

BECKY: Mm-hmm.

BUFFETT: And you know, I dress up and do every­thing I can to, you know, talk about my bal­ance sheet. But they–they're God in the rat­ings field and Stan­dard & Poor's, and I need their rat­ings. And if they tell me the bill is X, I pay that, and if they tell me the bill is X plus 10 per­cent, I pay that. You know, if Coca-Cola charges too much, you know, you may think about drink­ing Pepsi Cola, but in the rat­ing agency busi­ness, you need those two. and if that–either peo­ple get so upset with them or what­ever it may be, or Con­gress gets upset, that could dis­ap­pear. It won't dis­ap­pear from nat­ural rea­sons. I mean, it is a nat­ural duop­oly, just like–it's a lit­tle dif­fer­ent than Fred­die and Fan­nie were, but they also had some spe­cific advan­tage. Some­times you find sit­u­a­tions where you get a natural–well, you used to have that in the news­pa­per busi­ness. You had a nat­ural monop­oly in big cities. It wasn't–it wasn't ille­gal, it just worked out that way.

BECKY: Mm-hmm.

BUFFETT: And that's what hap­pened in rat­ings agen­cies. But it's not as bullet-proof as it was. Although, I will say that...

BECKY: Does that why you've been selling?

BUFFETT: Well, we haven't sold that aggressively.

BECKY: Mm-hmm.

BUFFETT: I mean, if you look at it dur­ing the course of 2010, we sold a very small amount of the–it looked to me that that threat was reced­ing to some degree. But it's dif­fer­ent than it was five years ago.

BECKY: OK. Another ques­tion comes in from Chris­t­ian in Ger­many who writes, "You're invested in Amer­i­can Express, but you don't like credit cards. How does this match?" And I'm guess­ing Chris­t­ian is refer­ring to what you were talk­ing about in your grandfather's letter.

BUFFETT: Yeah. No, I think–we offer credit cards at our fur­ni­ture store, our jew­elry store, I mean, the Amer­i­can pub­lic is going to use credit cards. I mean, if you say you're not going to accept credit cards, you might as well say you're not going to accept money if you're a retailer. But I tell every stu­dent class I get, high school stu­dents, uni­ver­sity stu­dents, you know, they'd be bet­ter off if they never used credit cards now.

BECKY: Mm-hmm.

BUFFETT: Now if you use them and you pay at the end of the month so you don't start revolv­ing, that's another ques­tion. But I can't make money if I'm out bor­row­ing, you know, at what­ever the rate may be, 12 per­cent, 14 per­cent, 16 per­cent, when you know, Libor's a quar­ter of a per­cent. I mean, the world isn't that inef­fi­cient. So...

BECKY: Right.

BUFFETT: ...I–if I'm going to go broke, if I bor­row at credit card rates, you know, what kind of–they're going to get in trou­ble. I get all kinds of let­ters from peo­ple who've got­ten in trou­ble on credit cards. So I think it isn't going to hap­pen, but I think if credit cards didn't exist, I think prob­a­bly the econ­omy would be bet­ter off.

BECKY: Wow. Does Amer­i­can Express know you feel that way?

BUFFETT: It isn't going to hap­pen. It isn't going to hap­pen. I mean, you know, peo­ple are going to do it. I mean, you know, and I under­stand why they do it. You know, it's so nice to think that you know, I want this today and I'll pay for it tomorrow.

BECKY: Mm-hmm.

BUFFETT: But it gets a lot of peo­ple in trou­ble and it's expen­sive. And it isn't because the credit card com­pa­nies are get­ting rich, incidentally.

BECKY: Sure.

BUFFETT: I mean, I went into the credit card busi­ness at GEICO, I thought I was this genius a cou­ple of years ago and I was going to sell–have credit cards for GEICO cus­tomers because we have them at the fur­ni­ture mart and other places and I lost about, I don't know, $60 mil­lion later on. Our losses were quite sig­nif­i­cant. I mean, credit card com­pa­nies run big credit losses, it's an expen­sive sort of busi­ness. So it isn't that they're get­ting rich, nec­es­sar­ily, at 12 to 14 per­cent, but that doesn't do their cus­tomer any good that's pay­ing that amount.

BECKY: Let me ask you one more about Amer­i­can Express and then Joe has a ques­tion, too. But David from Lon­don writes in, that "as AMEX's largest share­holder, are you con­cerned that Con­gress will reduce the credit inter­changes fees as they have done for debit inter­changes? Those account for the vast major­ity of AMEX's revenue."

BUFFETT: Yeah. Well, Amer­i­can Express has a very spe­cial card. I mean, it. The aver­age Amer­i­can Express card holder, I think, I think they're prob­a­bly charg­ing, I don't know, 13, $14,000 a year. That's four times of what–or five times, maybe, I don't have the exact fig­ures, what they're charg­ing at Visa. And the Amer­i­can Express card car­ries more cachet, by far, than a Visa and it has more util­ity in many dif­fer­ent ways. American–I decided the Amer­i­can Express card was spe­cial, actu­ally, back in the early 1960s. The first credit card was the Din­ers Club card.

BECKY: Mm-hmm.

BUFFETT: And the Din­ers Club card kind of swept through. It was a–it was a hot stock and all of that.

BECKY: Mm-hmm.

BUFFETT: And then Amer­i­can Express came in as a defen­sive mea­sure, they thought it was going to knock out their traveler's checks. And they priced their card higher than the Din­ers Club. Now imag­ine com­ing in against the lead­ing guy and charg­ing more. But they estab­lished their card as some­thing spe­cial and it is some­thing spe­cial. So it is–it is a–it is a supe­rior card for some­body, par­tic­u­larly, that's a big spender. My wife had one of those cards that was, you know, one of those black cards that cost a lot of money and every­thing. I still carry the green card.

BECKY: OK, Joe:

JOE: Yeah, thanks. So War­ren, so I've been sit­ting here think­ing, I under­stand that chew­ing gum, peo­ple like to chew gum, I got that, and See's and make–you know, See's candy. I was think­ing, you know, maybe a den­tal chain might be good, too. But what I'm get­ting at–where I'm going with this is I think about media and I think about the prospects for media and I don't know whether peo­ple keep chew­ing gum. I don't chew that much, but media is so per­va­sive and I just look at the out­look for media and I think about 1.2 bil­lion peo­ple in China, but I don't know how to play it right now and I don't know whether you know how. I just see a huge opportunity.

BUFFETT: I...

JOE: I see a huge oppor­tu­nity, but I don't know what to do with it. And I'm won­der­ing if you could help me.

BUFFETT: Peo­ple want to be enter­tained and they want to be informed. I mean, the demand for that is huge, is world­wide, it's going to go on for­ever. So you know, news­pa­pers sat­isfy that in a very impor­tant way, par­tic­u­larly on a local basis. And the nature of news­pa­pers was that you didn't want to sub­scribe to five of them, you sub­scribed to one and if there were two in town and one had 1,000 ads and one had 200 ads, you were going to buy the one with 1,000 ads because it told you were more jobs were avail­able, more apart­ments were avail­able, it gave you more sports news and what­ever. So it lent itself to a sin­gle prod­uct. Now you have media where you go to the Inter­net and you can go–you can essen­tially hop from one source to another, you know, in a–in a frac­tion of a sec­ond. So it's a different–it's a whole dif­fer­ent equa­tion. It isn't–the desire for enter­tain­ment and infor­ma­tion, you know, is–will be around for­ever. It's insa­tiable. How to get paid for it appro­pri­ately, you know, the world has changed and it's changed dra­mat­i­cally, and I do not con­sider myself an expert in the least about where media is going to go in the next 10 or 20 years. I do not know where the money is going to be made. Some­body will make a lot of money, but I'm just not that good at pick­ing the future on it. I under­stood the past on that. I under­stood the big net­work tele­vi­sion sta­tion. I mean, back when there were three net­works only in the '60s, you could have run a test pat­tern, you know, on your tele­vi­sion sta­tion and made a lot of money. It was–it was–it was a cinch. The orders came in over the tran­som. But all of a sud­den they started putting more high­ways out there, more elec­tronic high­ways and the fact that you had one of the three elec­tronic high­ways dimin­ished in impor­tance enor­mously, so now you've got a net­work that is get­ting a 10 per­cent share, los­ing tons of money, and you'll have a net­work with, you know, a 2 share, like ESPN, mak­ing a for­tune because of the way the dynam­ics have worked out. I don't have any great insights on that for the future. If I did, I'd–it's just–I'm just not smart enough.

JOE: I hear what you're say­ing, it's the same prob­lem every­one has. I don't even know, is it con­tent? Is that king? Or is it deliv­ery, like Apple? I mean, you look at, Apple might be the per­fect com­pany for when I–when I, you know, with all these mobile devices.

BUFFETT: Yeah.

JOE: But I don't even know whether it's con­tent or the dis­tri­b­u­tion that is–that win.

BUFFETT: Well, if you're the best heavy­weight fighter in the world, which is the way I often think of you, Joe, actu­ally, but if you're the best heavy­weight fighter in the world, if you're the best singer in the world, you know, what­ever it may be, you've got the ulti­mate asset. I mean, the deliv­ery mech­a­nism will pay you one way or another and you can com­mand it from them. But obvi­ously, I'm not–I'm not in a posi­tion to com­pete in that game. So the only way I can com­pete is in the deliv­ery mech­a­nisms and all that and I'm just not that smart. But the answer is I don't have to be right about every­thing or even under­stand every­thing, I don't have to know what cocoa beans are going to do or what cotton's going to do, I just have to right on the deci­sions I make. So I stay with the sim­ple things. Now a sim­ple thing many years ago, back in 1965 I owned 5 per­cent of Dis­ney and the whole Dis­ney com­pany was sell­ing for $80 mil­lion, so at 4 mil­lion bucks bought 5 per­cent of the com­pany. Well, Dis­ney had a tremen­dous fran­chise and they could bring out "Snow White" every seven years or "Mary Pop­pins" or what­ever it might be and wrote them down to zero, ini­tially. Well, that was an easy deci­sion. But I don't see easy deci­sions like that now and if I don't see an easy deci­sion, I don't play.

BECKY: War­ren, let me bring up a ques­tion from Pierce in Green­wich, Con­necti­cut. He writes in about Apple, since you just men­tioned it. "Do you feel the Steve Jobs saga has already taken its toll on Apple's stock price or do you feel it has yet to make its mark?"

BUFFETT: Oh, I don't–I don't know that much about Apple. I mean, all I know is Apple is an absolutely phe­nom­e­nal com­pany. I mean, to think of where they were 10 or 15 years ago and where they are now.

BECKY: Mm-hmm.

BUFFETT: And that's been done by inno­va­tion. I mean, and I think Steve Jobs has had a whole lot to do with that. But...

BECKY: I think that's the big ques­tion is how impor­tant is Steve Jobs to that company?

BUFFETT: Well, he's enor­mously impor­tant to Apple. And you know, Walt Dis­ney was impor­tant to Walt Dis­ney, a com­pany. I mean, there's cer­tain tal­ents that are really rare and Steven Spiel­berg is impor­tant, you know, to his busi­ness. I mean, it–there–people who can read the needs of the Amer­i­can pub­lic before the Amer­i­can pub­lic even real­izes that it has those needs, and then have the genius to cre­ate a prod­uct that sat­is­fies those needs and gets there fast, and then is attrac­tive, you know, in terms of all kinds of things, func­tion­al­ity that you can't believe, they deserve to get very rich. I mean, they–he saw some­thing that I didn't see five years ago or 10 years ago.

BECKY: Mm-hmm.

CARL: I think–it kind of sounds like you're describ­ing SQUAWK BOX.

JOE: Yeah, SQUAWK BOX. We're fast, we're enter­tain­ing, but then I also thought, I thought you were–when you were talk­ing about me, I thought you were even­tu­ally going to end up with either a News Corp or a Com­cast, you know, just to pull a name out of the–out of the thin air.

CARL: War­ren knows...

BUFFETT: Yeah.

CARL: War­ren knows some­thing of Comcast.

JOE: Or a–or a Dis­ney or some­thing. I mean, I don't know, I'm just–one of those–the big com­pa­nies, I think–I think it helps to have some size and some diver­sity with all your assets, but...

BUFFETT: Well, but of course, the big com­pa­nies, you know, if you go back 30 years ago, they started going for diver­sity with CBS. I mean, CBS ruled the–it was the Tiffany net­work and it even owned the New York Yan­kees at one point. So it's very tough. Gen­eral Motors ruled the world, you know, when I was a young investor. It–Sears ruled the world of mer­chan­dise. It's not so easy to pick the win­ners. It looks easy in ret­ro­spect always.

JOE: Yeah.

BUFFETT: You know there will be win­ners. I mean, in media there will be huge win­ners. I mean, some­body that can fig­ure out a way to attract mil­lions of users, like just take a Face­book or something.

JOE: Mm-hmm.

BUFFETT: Imag­ine that, you know, being in the mind of a guy five years ago and now mil­lions, hun­dreds of mil­lions of peo­ple, you know, build their lives around it to some degree. That's amaz­ing. But I am not the guy that can do that, and I'm not the guy who can spot the guys who can do that. But for­tu­nately, I don't have to be.

BECKY: OK, guys, we're going to con­tinue this con­ver­sa­tion, but for now we'll send it back to you, Joe and Carl, in the studio.

CARL: I still like War­ren call­ing Joe a prize fighter because I pic­ture you at a–at a weigh-in in your under­wear on the scale.

JOE: Oh my God. I got some advice...

BUFFETT: He's–he is...

JOE: I don't–you know what?

BUFFETT: He's known as the Mike–he's the Mike Tyson of cable.

CARL: Yeah. He'll bite your ear off.

JOE: Bite your ear off. I might get one of those–one of those tat–do you think that would work, one of those tat­toos on my...

CARL: Yeah, it would look good. That's a good look for you.

JOE: I don't know.

CARL: Any­way.

BECKY: Hey, guys, before you go, real quickly, let me point out one other thing. We didn't get a chance to men­tion this ear­lier, but I know, Joe and Carl, you have both gone back and forth, box­ers and briefs, box­ers and briefs.

JOE: Yeah.

BECKY: Today War­ren wore in a spe­cial tie which shows some of his inter­ests as well.

CARL: Really?

BUFFETT: Yeah, this is a–I don't know whether you can see this, this is a Fruit of the Loom tie, and I actu­ally have this for air­planes and GEICO and a bunch of oth­ers. But I thought in honor of you, Joe, I would wear my under­wear tie today. At Fruit of the Loom, you know, our motto is "we cover the asses of the masses," and I thought of you when we–I put this tie on.

JOE: That is–you know what? We could not see it, but we just did. I really–I like that. But I–Carl's got the right...

BUFFETT: You like that one?

JOE: Carl, you don't have to choose. You are a box­ers combo brief guy, right?

CARL: Yes.

JOE: And they make something...

CARL: And you are a tighty whities guy because–you even have the under­wear for the hands, remem­ber? Jane Wells brought you...

JOE: I have underwear–I have underwear...

CARL: ...hand underwear.

JOE: No, I'm a...

BUFFETT: I wish I hadn't started this!

CARL: I know.

JOE: Yeah, I know. I know. But you did.

CARL: Thanks for nothing.

BECKY: You brought it up.

JOE: But you did. And it doesn't take much to get us to talk about this, War­ren. Yeah, we'll...

BUFFETT: I can tell that.

JOE: Oh, yeah, OK, we've got... CARL: A lot more still to come from Omaha. We still got the ADP num­ber com­ing, we'll get that num­ber and the reac­tion ahead of Friday's jobs num­ber. A lot more from the Ora­cle of Omaha as well when we come back.

BECKY: All right, wel­come back, every­body. We are live in Omaha, Nebraska, at the Durham Museum. We're speak­ing to the one and only War­ren Buf­fett all morn­ing long, and now it's time to get back to some of your e-mails. You've been send­ing them in, and we do appre­ci­ate them. They've been thought­ful e-mails. Got a lot to get through. And, War­ren, why don't we jump right into this?

BUFFETT: OK.

BECKY: There were a lot of ques­tions that came in regard­ing Berk­shire, peo­ple who still had ques­tions after they read the let­ter. This came in from Steve in Dal­las, Texas. He writes, "After a year of full own­er­ship of BNSF," the Burling­ton North­ern, "is there any­thing you know now about the com­pany that you didn't know from read­ing the annual reports, 10-Ks and other pub­lic infor­ma­tion? In other words, does full own­er­ship con­fer addi­tional infor­ma­tion advan­tages that you did not have when you were a minor­ity shareholder?"

BUFFETT: Well, it would if I dug into it. And, you know, I will learn some­thing occa­sion­ally about–I prob­a­bly know a lit­tle bit more about the Rail Labor Act than I did ear­lier. You know, but noth­ing mate­r­ial. I mean, it–I've only been to the com­pany once since we bought it, and I get–I look at a few more fig­ures than I might oth­er­wise. But I–but if I didn't know enough before I wrote the check for 34 bil­lion, I mean, you know, I was mak­ing a mis­take. You know, I really have not–I've learned noth­ing of sig­nif­i­cance spe­cific to the rail­road. Now, I would say that over the last year my appre­ci­a­tion of the com­pet­i­tive posi­tion of the rail indus­try vis-a-vis truck­ing has improved some­what. There's–just the other day the truck­ers announced they're going to have to spend–or they're going to have to raise prices sig­nif­i­cantly this year. And so I think if any­thing, my appre­ci­a­tion for the com­pet­i­tive advan­tages of rail­road both for the owner and for soci­ety have increased significantly.

BECKY: OK. Let's bring in a ques­tion from Richard in Tuc­son, Ari­zona, who says, "How do you eval­u­ate the effec­tive­ness of the $900 mil­lion spent on adver­tis­ing last year at GEICO?"

BUFFETT: That's a good ques­tion. Yeah, peo­ple have been ask­ing that ques­tion ever since they started adver­tis­ing. I think it was John Dor­rance at Campbell's Soup 75 years ago or so when it was a big adver­tiser, and they said, you know, `Isn't half your money wasted in–on adver­tis­ing?' He says, `Yeah,' he says, `I just don't know which half.' Well, we can mea­sure cer­tain types of adver­tis­ing. I mean, when we do direct mail adver­tis­ing, you know, we get a response which gets mea­sured. And we do cold phone num­bers and that sort of thing. But now with three-quarters almost of our quotes com­ing from peo­ple who come to the Inter­net, you know, what dri­ves them to geico.com, who knows? I mean, cer­tainly our tele­vi­sion adver­tis­ing does it. All I know is it's work­ing. In Feb­ru­ary we had the great­est gain in pol­i­cy­hold­ers of any month in our his­tory. And it blows me away.

BECKY: Hm.

BUFFETT: I mean, we had a gain of about 130,000 pol­i­cy­hold­ers in one month. If you think of 130,000 house­holds, that's like a town of 300,000 just get­ting added in one month. And why they come, you know, what–that lit­tle gecko does won­ders and, you know, we get in people's minds that they're going–they might save money by check­ing with us. And it's a big, expen­sive item for most peo­ple, auto insur­ance, and if they can save a few hun­dred dol­lars, it's mean­ing­ful. So–but exactly why we get more inquiries in Feb­ru­ary than we were get­ting last Octo­ber, you know, I don't know the answer. All I know is if I thought spend­ing another bil­lion dol­lars this year would work in an appre­cia­ble way, I would write a check so fast. I mean, I love advertising.

BECKY: You think the gecko works bet­ter than that catchy name, Gov­ern­ment Employ­ees Insur­ance Company?

BUFFETT: It–who knows what does it. It–one way or another–I mean, we were spend­ing about 20 mil­lion a year when I took over in 1995, and now we're spend­ing 900 mil­lion. And all I know is every month I urge them to spend more. I mean, it–we want every Amer­i­can to at least give us a try. And what we have seen is that of the peo­ple that call us, you know, if they phone us, we're going to get–over 40 per­cent of those peo­ple are going to become our cus­tomers. And when you get that kind of a response, you know, you bet­ter be out there talk­ing to people.

BECKY: OK, let's bring in another ques­tion. Robert from Potomac, Mary­land, writes in–and this is some­thing that a lot of peo­ple are con­fused on, so hope­fully you can clear this up. But, "Why did you allow, I assume, the new man­ager to liq­ui­date many of Lou Simpson's stocks? If they met your `for­ever' hold­ing period cri­te­ria with Simp­son, why sell? Simpson's record is long-term proven. The new man­ager has no record long enough to show a sim­i­lar com­pe­tency or that his results are just luck. These stock sales are incon­sis­tent with your for­ever hold­ing period advice." So maybe you could clar­ify what's really hap­pen­ing there.

BUFFETT: Yeah. Well, we buy–when I say I, I buy stocks with the idea I'd be happy hold­ing them for­ever. We don't end up own­ing them for­ever, obvi­ously, in many cases, because you find some­thing else that's more attrac­tive and–or some­times man­age­ments change and who knows what. But Lou Simp­son was man­ag­ing his own port­fo­lio. He man­aged it for 21 years, did a sen­sa­tional job. But when he said he was going to leave in June, he and I both decided he was going to liq­ui­date his port­fo­lio between then and the end of the year. In other words, I never inherit any invest­ment deci­sion from some­body else. If Char­lie Munger made me a gift of 100 shares of some stock, I would sell it then–and then–I would then decide whether I wanted to buy it again myself. But I do not believe in default-type deci­sions on invest­ments. So when Lou left, his port­fo­lio left. When a new man comes in, his port­fo­lio comes in.

BECKY: And the two aren't related.

BUFFETT: They're not related at all. Lou had maybe 15 or so stocks, gen­er­ally in the 3– to $400 mil­lion range, and he just sold them pro­por­tion­ally through­out the rest of the year. He wasn't going to be man­ag­ing them any­more, and I knew they were prob­a­bly good com­pa­nies, but I didn't want to buy them myself. And there's no rea­son, if I don't want to buy them myself, I should tell the next man­ager at Berkshire–of GEICO to man­age them. Todd is going to be respon­si­ble for his deci­sions, and–just as Lou was when he was there. And I want it to be Todd's portfolio.

BECKY: OK.

Carl, you have a ques­tion, too?

CARL: I was just won­der­ing, War­ren, ear­lier you talked about searching–hunting for ele­phants or even any busi­ness, and occa­sion­ally some busi­nesses do not want to sell to you for a vari­ety of rea­sons. Does that ever take you by sur­prise? Do you ever say, `Excuse me, I'm War­ren Buf­fett. I'm kind of a big deal, and the oppor­tu­nity to be owned by Berk­shire doesn't–is kind of a golden ring that may not come around too much'?

BUFFETT: That isn't exactly the way I present it to peo­ple. No, it's very–a really good busi­ness, like I say, if it's owned pri­vately, they shouldn't sell. I mean, I–I've been called in by lots of fam­i­lies, and I–and they're usu­ally good busi­nesses. And I–the first thing I tell them is that you should keep this busi­ness unless there's some com­pelling rea­son other than the dol­lars you'll get from it. Because you'll get a lot of dol­lars from me, but those dol­lars are not going to buy a bet­ter busi­ness than the one you've got already. I mean, I–you know, that's why I'm buy­ing it. So I don't think–the ques­tion usually–the ques­tion is now is find­ing big busi­nesses. I mean, there aren't that many big busi­nesses in the world, and then I want big good busi­nesses, and that nar­rows it down fur­ther. And then you have to have peo­ple who for some rea­son or another want to sell on the other side. And that hap­pens from time to time in America.

I've–I had a fel­low come to see me a few years ago, and he loves his busi­ness, it's a won­der­ful busi­ness, and he said, `War­ren, I want to sell you this busi­ness.' And he said, `I want to sell you this busi­ness because I'm 61 years old and I'm in good health and I love run­ning it, but I don't know, you know, what would hap­pen if some­thing hap­pened to me tonight.' He said, `I've seen'–he'd bought another busi­ness where the fam­ily had fallen apart when the–when the owner had died, and he said, `I don't want to leave my wife with that kind of a prob­lem, and my chil­dren, and they wouldn't know what to do with it. So as long as I get to keep run­ning the busi­ness, I've got all the money in the world, and so I want to have the joy of run­ning the busi­ness and I do not want to have the worry of what hap­pens if I'm not around tomor­row.' And he said, `You're the only guy that can solve that.' So that's the only way I win beauty con­tests is when I'm the only guy in them.

CARL: All right, we're going to...

BECKY: All right, I think–go ahead.

CARL: Beck, we'll con­tinue the con­ver­sa­tion after we reset at the top of the hour. A lot more com­ing up with War­ren Buf­fett and your e-mail ques­tions, plus the count­down to jobs Fri­day is ongo­ing. It includes the ADP num­ber in about 17 min­utes' time. We'll get that num­ber and the instant reac­tion when SQUAWK BOX comes right back.

JOE: Ho, oh, hey, I thought we would be in...(unintelligible). Wel­come back to SQUAWK BOX here on CNBC, first in busi­ness world­wide. I'm Joe Ker­nen. I'm with Carl Quin­tanilla at CNBC head­quar­ters. And Becky, who looks really beautiful.

CARL: Rav­ish­ing.

JOE: What'd you do, bring a–who'd you bring–who's out there with you?

BECKY: I have great peo­ple out there.

JOE: And War­ren looks–yeah–Warren looks good, too. That is War­ren Buffett.

CARL: Rav­ish­ing.

JOE: Yeah, rav­ish­ing. A leg­endary investor, War­ren Buf­fett, with his–he's wear­ing an under­wear tie. If you missed it, you should have been tuned in. He's been answering–he's been answering...

CARL: I think the term was asses to the masses.

JOE: Yeah, asses to the masses. He said that, yeah.

CARL: Yes.

BECKY: Cover the asses of the masses.

CARL: Right.

JOE: Right. All right, answer­ing viewer e-mails for the past two hours. We have many more ques­tions or e-mails to go. I've got more, Carl has more, Becky has more. Plenty to dis­cuss with him over the next 60 min­utes. First, though, Carl is going to bring us up to speed, as only he can do, on the morning's top head­lines. Carl:

CARL: Joe, thanks.

JOE: You're welcome.

CARL: Equity futures mean­while hold­ing onto some mod­er­ate gains, although Europe con­tin­ues to be in the red. And, Beck, the mar­ket also respond­ing, react­ing to some of the calls that War­ren has made in our first cou­ple of hours. Some of them, I think, rel­a­tively bold, right, look­ing for unem­ploy­ment in the low sev­ens by Elec­tion Day and other things like that.

BECKY: Yeah, that's right. You know, Carl, we've got­ten through a lot of ground this morn­ing. In case you missed some of the ear­lier points, why don't we talk very quickly about the econ­omy and unem­ploy­ment. As Joe and Carl men­tioned, we do have ADP report. That report com­ing up at 8:15. And, War­ren, we watch the ADP every month because we fig­ure it'll give us some indi­ca­tion about what's hap­pen­ing with the big jobs report on Fri­day. It hasn't been great in track­ing that lately, but do you watch the ADP?

BUFFETT: Well, I don't really. I watch our own busi­nesses. And we've got so many of them, I get a lot of data com­ing in all the time, and, you know I don't know how accu­rate those sur­veys are. I do know how many peo­ple we've got on the Union Pacific work­ing every day, or how many people's at Geico. And I was sur­prised inci­den­tally last year that our employ­ment only went up 1 per­cent, whereas our busi­nesses really did a lot more vol­ume over­all. And I don't think we're going to be able to con­tinue that. And there was–I think as our busi­nesses increase this year our employ­ment will go up much more in tan­dem with the rate of increase.

BECKY: What busi­nesses do you expect to see more hir­ing within the Berk­shire family?

BUFFETT: Well, I think most of–I think most of our busi­nesses will hire more peo­ple. And I mean I think our rail­road, you know, our rail­road dur­ing Jan­u­ary hired more peo­ple. But I know Geico will hire more peo­ple this year. But I think you'll see it. At Mar­mon, for exam­ple, one of our main busi­nesses there is leasing–building and leas­ing rail tank cars. Now, when you see those trains going down the tracks, you think those cars all belong to the rail­roads. They don't. The tank cars all belong to ship­pers or to peo­ple like us who lease them to ship­pers. We are–and we make those cars down in Alexan­dria, Vir­ginia. We are see­ing more peo­ple inter­ested in buy­ing tank cars for var­i­ous things, whether it's–I mean, it could be for ethanol, it could be–could be for all kinds of things that get car­ried in tank cars. We're see­ing more inter­est in that in just the last month or two. We will add peo­ple at Alexan­dria, Vir­ginia, to our tank car line. I don't know whether it'll be this month or three months from now or two months from now, but the orders are com­ing in. And you see that in one area after another in our busi­nesses. So I think we will–I would be sur­prised if we don't add more–quite a bit more than 3,000 peo­ple this year to our over­all employment.

BECKY: You know, you talked in the annual let­ter about opti­mism for this country.

BUFFETT: Sure.

BECKY: You've talked about how the econ­omy is improv­ing and how the invest­ing out­look, you've said, is get­ting back to a nor­mal sit­u­a­tion, that things look very good in terms of the div­i­dends you expect to be get­ting paid back from a lot of your major invest­ments. You also, though, wrote in the annual let­ter about GE and Gold­man. Those are two com­pa­nies that you made major invest­ments in pre­ferred shares, and you did men­tion that by the end of this year you expect both of those com­pa­nies to call you on those.

BUFFETT: Yeah, I made a mis­take on those. I should have–I should have snuck in one sen­tence that said, "You have to find me if you're going to pay me off." And then, you know, I would have gone in the wit­ness pro­tec­tion pro­gram and Immelt and Blank­fein would have had these peo­ple out look­ing for me. But they know where to find me, and as soon as Gold­man can pay me off, which is deter­mined by the Fed­eral Reserve, my guess is that they will. GE, by con­tract, can't pay me off till some­time in Octo­ber and I think they will–they've said they will pay us off as quickly as pos­si­ble. So that–you know, I–Goldman, I think, I men­tioned we get $15 a sec­ond as a div­i­dend. So tick, tick, tick, that's 15 bucks every time. And I love to hear those ticks, but they don't like to hear those ticks. And as soon as–when the Fed gives them the green light, I have a feel­ing that Lloyd will char­ter a Net­Jets plane and fly that check out to me.

BECKY: OK. Joe, you have a ques­tion, too?

JOE: Yeah, I do. And a–I should say I prob­a­bly have a follow-up, too, because I'm going to get to where I'm going, but it always takes a while. I know that. War­ren, we think about jobs in the coun­try and how to get jobs. And then we also think about how to run busi­nesses. And that huge–or that jet acqui­si­tion you made from Bom­bardier, you could have bought Gulf­stream. Do you–do you ever think about social respon­si­bil­ity in terms of where the jobs will be–will be gen­er­ated? That could have gone to Gulf­stream, but it didn't, it went to Bom­bardier, right?

BUFFETT: Yeah, we think about what will be the best deal for our cus­tomers in terms of what they're going to want in terms of a wide cabin, long-range plane. And in the end the cus­tomer dri­ves every deci­sion we make on some­thing of that sort.

JOE: That's a global–are you're buying–is that plane you're talk­ing about?

BUFFETT: It's a series of four planes over the next decade or so. Even­tu­ally they'll bring in a 7,000 and an 8,000, so there's–and inci­den­tally Gulf­stream will be bring­ing in new planes over the next decade, too. But we eval­u­ated the options just as we did in the small cabin planes, tried to decide what, in terms of the demands of our own­ers, what they want in terms of range, in terms of cabin width, in terms of all kinds of things, cost, and made that deci­sion, because in the end we can buy planes, but we also have to sell planes, and the customer's going to make that decision.

JOE: We–I guess this indi­cates that both busi­ness travel, which I fig­ure use the big cabin ones, and also–you bought–you bought in Mar­quis jet, right? That goes more to, what?

BUFFETT: Right.

JOE: Plea­sure? How's that acqui­si­tion going, and are we see­ing then, you're say­ing, a bounce in both busi­ness travel and individuals?

BUFFETT: Yeah. And we bought Mar­quis late last year, and Kenny Dichter, who runs that oper­a­tion, is doing a ter­rific job for us. Our sales of Mar­quis cards in the month since we bought it are appre­cia­bly ahead of the same months a year ago, and it made sense for us to buy Mar­quis and I'm glad we own it. We're seeing–we're see­ing increases in both per­sonal use and in busi­ness use. And some­times it's hard to tell. Some­times in small busi­nesses an owner will have $100 or some­thing, and we don't really know whether he's using it for per­sonal or busi­ness use.

But we have seen–we have not seen a surge in demand at all. We have seen our present cus­tomers using more hours per month by a con­sid­er­able mar­gin than they were two years ago. They're usage right after Lehman fell off dra­mat­i­cally. They were still pay­ing us the monthly man­age­ment fee and all of it. They had the right to the same num­ber of hours, but they weren't using them. It was amaz­ing to me, because you had these very wealthy peo­ple and they had homes and, you know, that they went to at Christ­mas or Thanks­giv­ing. But maybe they started going to them by bus. But our usage really fell off there sig­nif­i­cantly in the six months fol­low­ing Lehman. It's come back quite a ways. Our sales have picked up, but they're not remotely like they were four or five years ago when every­body was feel­ing flush. JOE: Well, you're mak­ing a huge bet on the future of this. And, you know, you–sometimes you lessen invest­ments like Wash­ing­ton Post or some­thing, that it looks like even though Net­Jets has never–has it been a big mon­ey­maker for you? You're going in, you know, full bore at this point.

BUFFETT: Yeah. Well, Net, since we bought it, we made a cou­ple hun­dred mil­lion dol­lars last year and that brought it–brought us back to where for the full 11 years we more or less broke even.

JOE: Right.

BUFFETT: So it has not been a sat­is­fac­tory invest­ment finan­cially. It's been–it's been a sig­nif­i­cant win­ner in the mar­ket­place. We have five times the mar­ket share of our lead­ing com­peti­tor. Nobody's gained mar­ket share on us, nobody gets the cus­tomer sat­is­fac­tion reports that we get. But we have not–we have not made money. We were spend­ing more money than we were tak­ing in, which catches up with you even­tu­ally. Under Dave Sokol, it's now doing very well. But it is now–we have not gone back to a period like 2005 and '06 and '07 when the hedge fund oper­a­tors and every­body were sign­ing up hand over fist. We're sell­ing more than we were a year ago and are using more than a year ago, but it's not dramatic.

JOE: Well, it looks like you're expect­ing it to be.

BECKY: Hey, War­ren, real quickly.

JOE: I'm sorry, Beck, but...

BUFFETT: Well, I...

BECKY: Oh, that's OK. Go ahead, Joe.

BUFFETT: Joe, I just feel if we could get you in the fold that mil­lions would fol­low you. I mean, you're a trend­set­ter. So...

JOE: I have asked you many times for one of the–I don't know how we can swing it, War­ren, but a SQUAWK jet has been on our list of things to have. You want one, too? A Lies­man jet or a SQUAWK?

STEVE LIESMAN: SQUAWK...(unintelligible).

BUFFETT: If you'll just–if you'll just let me gar­nish your wages I could promise you you'll be in the–you'll be in the pilot's seat.

JOE: You–can you gar­nish into the here­after? Because that's what it would take, I think.

CARL: How about we just put it on a credit card.

JOE: Yeah. Put it on a credit card, that's right.

BECKY: Put it on our AmEx.

BUFFETT: Maybe you and Carl ought to go in together.

CARL: He did send us a brick, and we will never for­get that.

BECKY: War­ren, let...

JOE: No, you sent–you sent–you sent me a brick and put my name on it.

BUFFETT: Yeah, and I do not remem­ber a thank you note, but maybe I...

BECKY: War­ren, I want to ask real quickly, we just put up the pic­ture of Dave Sokol. He's one of the man­agers who is repeat­edly men­tioned as a poten­tial suc­ces­sor. You said in your annual let­ter that there's a man­ager you talk to every sin­gle day. Is that Dave Sokol? Is that a Ajit?

BUFFETT: It's Ajit. I try–I talk to Dave very fre­quently, but I talk to Ajit every day. We have a lot of fun talk­ing every day. I for­get what the deal was he was–we were talk­ing about yes­ter­day, but it was–it was some insur­ance over–as you know, they've had two earth­quakes in New Zealand and then floods in Aus­tralia, so that part of the world has been hit very hard by cat­a­stro­phe. So there's a demand for more cat­a­stro­phe insur­ance, for exam­ple, over there. And so Ajit and I just sit down and try and fig­ure out what the chances are of another earth­quake in New Zealand. And who bet­ter than us? BECKY: You also just saw–we saw some head­lines cross­ing about how Berkshire's going to be get­ting into the India insur­ance sec­tor. That's a new move. Is that what this is...

BUFFETT: Yeah, that just hap­pened. And I think we just got approved within maybe the last 48 hours. And we are going to have an agency over there that will be selling–I think it's going to be called Berk­shire Direct.

BECKY: Mm-hmm.

BUFFETT: And I'll be over there in about three weeks, and I think by then we will be up and run­ning. We just got the per­mit the other day, and so we're hir­ing peo­ple for the phones and all of that. So that should be fun.

BECKY: Hm. All right, real quickly, just to bring this back to jobs because we do have ADP com­ing out in just a moment, there are a lot of econ­o­mists who are not expect­ing any sig­nif­i­cant decline in the unem­ploy­ment rate this year; some who aren't even expect­ing any until the end of next year. What's your own per­sonal prediction?

BUFFETT: I think we'll cre­ate more jobs this year than we did last year. Now, the unem­ploy­ment rate bounces around in kind of a funny way depend­ing on who declares them­selves in the–in the labor force. But I think we will have bet­ter luck cre­at­ing jobs in 2011 than 2010. Just–I just see busi­nesses improv­ing. And I think–I think they were very reluc­tant to hired when they first–saw the first robin or two.

BECKY: Mm-hmm.

BUFFETT: I mean, they–they've been through such a painful period...

BECKY: Mm-hmm.

BUFFETT: ...that they just, they were not going to bring a bunch of peo­ple back on until they really needed to bring them on.

BECKY: Mm-hmm.

BUFFETT: But they need to bring them on now.

BECKY: OK. And, Carl, I think you have more on that right now.

CARL: We do. We're going to get ADP, Beck, in about 40 seconds.

CARL: Let's send it back to Becky in Omaha. Beck:

BECKY: Hey, Carl, thank you. You know, War­ren, we just heard the ADP num­bers here, and obvi­ously they were a lit­tle stronger than had been expected. Everybody's play­ing this guess­ing game right now, though, try­ing to fig­ure out where the econ­omy stands. And that brings us back to a dis­cus­sion we had ear­lier this morn­ing, try­ing to fig­ure out what the Fed does next with its mon­e­tary pol­icy. You said if you were Ben Bernanke, you'd end QE2 right now based on how you think the economy's doing.

BUFFETT: I think the econ­omy is com­ing back, and I think that we'll never know. There's prob­a­bly three big vari­ables in the economy's devel­op­ment, and we like to think of mon­e­tary pol­icy and fis­cal pol­icy because we all learn about them in school and all that. I think the most impor­tant fac­tor by far is just this under­ly­ing regen­er­a­tive capac­ity of cap­i­tal­ism. I mean, if you go back a cen­tury or so, nobody ever heard of mon­e­tary pol­icy or fis­cal pol­icy. And we had reces­sions, and they cured them­selves. And they cured them­selves because mil­lions of Amer­i­cans were try­ing how to–figure out how to do things bet­ter the next day. I mean, cap­i­tal­ism works. And I think in this par­tic­u­lar reces­sion, I think it was enor­mously impor­tant what the Fed and the Trea­sury and gov­ern­ment did imme­di­ately. They had to end the panic. But I think if you talk about what's hap­pened in the last year, I think that who knows the impor­tance of the vari­ables of fis­cal and mon­e­tary pol­icy. If you–if you ask me, they're num­ber two and three com­pared to this nat­ural regen­er­a­tive capac­ity. And I–we've had foot to the floor, as I've said, on mon­e­tary pol­icy, we've had foot to the floor on fis­cal pol­icy. But I think what's really get­ting job–the job done is the imag­i­na­tion, cre­ativ­ity, the energy of the Amer­i­can pub­lic in terms of keep­ing a sys­tem going that's worked mar­velously for sev­eral hun­dred years.

BECKY: Hey, Joe, you have a ques­tion, too?

JOE: Yeah, I got a spe­cific one, shift­ing gears a lit­tle bit. War­ren, you like–you love Wells Fargo. You talk about it a lot. You were in...

BUFFETT: Yep.

JOE: Berk­shire was in Bank of Amer­ica, and it wasn't a good expe­ri­ence, and you're out now. I think you lost two-thirds or some­thing. But, I mean, obvi­ously the finan­cial cri­sis hit. But that–that's mak­ing some–you're vot­ing with your feet there, I think, what, on man­age­ment, on the prospects for B of A? I mean, you like Well–you're stay­ing in another bank, why would you get out with a loss instead of the...

BUFFETT: Yeah.

JOE: Go ahead.

BUFFETT: I never–Joe, I never bought a share of Bank of Amer­ica. That was one of the 15 or so posi­tions of Lou Simp­son. So he did not make a deci­sion to sell Bank of Amer­ica in the sec­ond half of last year.

JOE: OK.

BUFFETT: He just–he was liq­ui­dat­ing his entire port­fo­lio. He sold a–he sold Nike. He hated to sell Nike. He loved Nike. But he was clean­ing out his port­fo­lio, and Todd's bring­ing in a new one. But I...

JOE: OK.

BUFFETT: Bank of Amer­ica was never part of a port­fo­lio I managed.

JOE: OK. So when you see Berk­shire liq­ui­dates its entire stake in Bank of Amer­ica, you can't say, oh my God, they don't like the prospects–or War­ren doesn't like the prospects for Mer­rill Lynch...

BUFFETT: No.

JOE: ...or Moynihan...

BUFFETT: No.

JOE: ...or you can't draw any con­clu­sions from that.

BUFFETT: No.

JOE: OK.

BUFFETT: Zero, zero. I never bought a share and I never sold a share personally.

JOE: All right. OK.

BECKY: War­ren, let's go back just to Fed pol­icy and some of the things that are hap­pen­ing. Joe men­tioned ear­lier about the idea that the gov­ern­ment, not just this government's print­ing money.

BUFFETT: Absolutely.

BECKY: Is it about to over­take us? You start to worry about inflation?

BUFFETT: Yeah. It–you know, in–I think, you know, we've got major prob­lems. And we're–and I said, we're always going to have prob­lems, so this does not mean I'm bear­ish on Amer­ica or any­thing. But we have a sit­u­a­tion in Con­gress where we have a 10 per­cent deficit in terms of GDP, and we may be drift­ing into even larger num­bers. I mean, we've made promises that–for the future that are really kind of incon­sis­tent with the rev­enue streams we'll have. There are three ways of solv­ing that: break­ing the promises of mod­i­fy­ing them, tax­ing a whole lot more, or inflat­ing your way out of it. And infla­tion is the–is the ulti­mate tax. I mean, it taxes peo­ple who don't know they're being taxed. It taxes peo­ple who believed in paper money, who believed in their gov­ern­ment. It's a particularly–you know, I find it–it's almost a–it's not the way gov­ern­ment should be behave, but they do behave that way. Ad it's the eas­i­est thing to do. I mean, we...

BECKY: Do you think we're inten­tion­ally doing that right now? Do you...

BUFFETT: Oh, I don't think it's so much inten­tional, but it's the fact we don't want to do the other things, and so it becomes the default option. And we are doing things–we are fol­low­ing poli­cies that will lead to lots of infla­tion down the road unless changes are made. And once–inflation is the kind of thing, when it gets started, you don't even–you don't par­tic­u­larly notice it. It's a lit­tle like a guy, you know, jump­ing off a 50-floor–out of a 50-story build­ing. The first 45 sto­ries, he really doesn't notice a lot of change, you know, in his circumstances.

BECKY: Mm-hmm.

BUFFETT: But even­tu­ally you hit the ground. And there is no way you can run the kind of deficits we're run­ning and fol­low­ing other poli­cies, and this is true around the world, with­out it being enor­mously infla­tion­ary. And no politi­cian is going to come out and say we're really going to solve this by mak­ing our money worth less. But–I mean, it'd be sui­cide to do it. But that is–that's the prac­ti­cal effect of the poli­cies that are being fol­lowed now. You know, they're not writ­ten in stone, they can–they can be changed. But the eas­ier course for gov­ern­ments to fol­low always is to inflate, and that's why paper money–and I don't dis­agree with your viewer that wrote in. I mean, paper money gen­er­ally has a lousy future. BECKY: Mm-hmm.

BUFFETT: And I, you know, a cou­ple of years ago when peo­ple were run­ning to cash, I said, you know, it's the worst thing you can have. I mean, there–the one thing I can guar­an­tee will not work well as an invest­ment is cash.

BECKY: Is cash a worse invest­ment now than it was two years ago?

BUFFETT: It–it's a–no, it's a–it's a lit­tle less worse because then the option was to buy so many other assets so cheap.

BECKY: Mm-hmm.

BUFFETT: I mean, you wanted to use cash then. Peo­ple said cash is king. The abil­ity to use cash then was king, but hav­ing the actual cash was the dumb­est thing you could do. And–but peo­ple run to cash and they run, you know–but paper money is not a good bet. And the more of it that you issue–I mean, there have to be con­se­quences to issu­ing paper money. There are con­se­quences to the–to the Fed buy­ing lots and lots and lots of secu­ri­ties and giv­ing cred­its to the bank­ing sys­tem in return. If it was all that easy, you know, we'd be doing it all the time.

BECKY: But you sound a lit­tle dif­fer­ent than you have on this point the last few times we've checked in with you. It sounds like this is a time, maybe an inflec­tion point where you're get­ting a lit­tle uncom­fort­able with this.

BUFFETT: Yeah, I wrote an op-ed piece in The New York Times and–over a year ago–and I said this is–this is OK now, but it's–but it is mor­phine, and you've got to get off of it. And we haven't shown much ten­dency to get off of it so far. I mean, this–you know, the Simpson-Bowles thing came in, and those are two ter­rific peo­ple, they worked hard at it. They got 11 out of 18 votes, you know, and nothing's been heard since. And that's wrong, in my opinion.

BECKY: That dis­ap­point you?

BUFFETT: Yeah.

BECKY: What would you like to see hap­pen? Would you like to see the panel's rec­om­men­da­tions be adopted?

BUFFETT: I would like to see some­thing seri­ously adopted that leaves us in a sit­u­a­tion down the road that is ten­able in terms of hav­ing a money that will retain its value to a very high extent. The fact that infla­tion now is 1 or 2 per­cent, you know, doesn't mean any­thing. I mean, that–you know, I–if you jump off the 50th floor, I mean, at the 45th floor, you know, you should not judge the suc­cess of your effort by where you are at that point.

BECKY: But address­ing this grow­ing prob­lem, you don't think is some­thing that can wait till after the 2012 elections?

BUFFETT: No, well, then there'll be a 2014 elec­tion. I mean, no, I think–I think if you've got a very impor­tant prob­lem, whether it's in busi­ness, whether it's in your per­sonal life, wher­ever it may be, you know, you address it promptly.

BECKY: OK. Carl, you have a ques­tion, too?

CARL: Yeah. War­ren, I mean, we're into some impor­tant stuff here now, talk­ing about Simpson-Bowles and what needs to be done. There's also this report out of Gold­man that sug­gests that the 61 bil­lion that the Con­gress is con­sid­er­ing in cuts for the fis­cal year could take a cou­ple per­cent­age points off GDP in the–in the sec­ond and third quar­ter, per­haps as many as 700,000 jobs. Whether or not you agree with that, does the momen­tum that the econ­omy have, is there enough cush­ion that we can sus­tain so-called aus­ter­ity? And what do you make of the UK's sit­u­a­tion, where they imple­mented some­thing tough, and right away their fourth quar­ter GDP went negative?

BUFFETT: Well, a 10 per­cent deficit of GDP, chang­ing that in a small way does not lead you to aus­ter­ity, believe me.

CARL: OK.

BUFFETT: That is a num­ber we haven't had since World War II. And, no, I'm very sus­pi­cious of all eco­nomic fore­casts, includ­ing my own, inci­den­tally. No, I think these peo­ple who toss out num­bers and say this bill, you know, saved us three bil­lion jobs, I think that is total–I just don't think they know what they're talk­ing about. I don't think I–I don't think I know what I'm talk­ing about either when I–it isn't that I think I have a bet­ter num­ber, but I can assure you that I've seen so much of that that I'm very skep­ti­cal. I think it–no, I think when you give some­body the stature of Alan Simp­son and Ersk­ine Bowles, and you put together a first-class com­mit­tee and they work very, very, very hard to get a com­pro­mise that 11 of the 18 sign onto when they have vastly dif­fer­ent polit­i­cal beliefs, I think you ought to take it pretty seri­ously. And the real ques­tion isn't the 61 bil­lion now or so, the real ques­tion is whether right now you're will­ing to say, `Here is what we're going to do so that these promises'–where–you've really got to start mod­i­fy­ing promises you've made for the future, or you've got to admit you're going to inflate your way into solv­ing those prob­lems. But we really haven't done that.

CARL: So you are not–you...

BECKY: Does that mean...

CARL: I was going to–just a quick follow-up, Becky.

BECKY: Go ahead, Carl.

CARL: You are–you're not wor­ried about spend­ing cuts, shrink­ing gov­ern­ment expen­di­tures, tak­ing a big bite out of GDP, that the more important–the more impor­tant motive is the long-term solu­tion, right?

BUFFETT: I think the dif­fer­ence between hav­ing 10 per­cent of GDP as your deficit and 9 per­cent is not going to be the dif­fer­ence in a recov­ery going on. But inci­den­tally, I have some thoughts on taxes, too, I mean, in terms of the dis­tri­b­u­tion of–there–if you look at the top level peo­ple in the coun­try, peo­ple like me, I mean, we are pay­ing our low­est tax rates in a long, long time, at–and, well, really for­ever. And so I think there actu­ally could be some­thing done on the rev­enue side, but it would be at the very top lev­els. I mean, I'm not talk­ing 250,000, I'm talk­ing peo­ple of incomes a lot larger than that. But I don't know whether you can actu­ally see this, it's the one thing I brought along. But–well, I guess I brought two things along, since I pulled out the wrong one. Here's a table, the IRS puts it out, and if you go back to 1992...

BECKY: Here, I'll take that.

BUFFETT: If you go back to 1992 at the bot­tom, you'll find that the–of the 400 top income tax returns filed in the United States, I think the income was around 45 mil­lion per per­son, and now in the last year shown there it's 340 mil­lion. Think of that, from 40 mil­lion to 340 mil­lion, while the aver­age Amer­i­can worker was going no place.

BECKY: I think it's down here.

BUFFETT: Now, if you go to the last page there...

BECKY: The last page?

BUFFETT: Yeah. You'll see the tax rate of those same four–not–of the 400 each year, over on the right-hand side, it starts at around 26 or 28 per­cent and it works its way steadily down to 16 per­cent. So while these peo­ple were hav­ing their incomes on aver­age go from 40 mil­lion a year to 340 mil­lion a year...

BECKY: (Unin­tel­li­gi­ble)

BUFFETT: ...their tax rate was going down from 26 to 16. And believe me, that is not the expe­ri­ence of the aver­age Amer­i­can. So there are things that can be done, and in my view should be done, and they will not slow down the Amer­i­can econ­omy at all.

BECKY: You know what? Let me ask a ques­tion from the...

JOE: Yeah. Four–that won't be enough–that won't be enough money...

BECKY: Go ahead, Joe.

JOE: ...right, War­ren? And you said that. Because they–it's got to–you got to go to the mid­dle class or–if you're going to do it on a–on the rev­enue side, on the–I mean, it would help a lit­tle, but you need to go down to maybe 250,000 or even below that to really make a dent if you don't address the spend­ing side, right?

BUFFETT: Well, you can do tens and tens of bil­lions on peo­ple with a mil­lion and up–and up of income, but you–but the big­ger thing actu­ally over time–but you have to say–you have to do it now. I mean, just say­ing, `Well, we're going to solve this in five years or 10 years,' yeah...

JOE: We...

BUFFETT: You really have to do some­thing about the promises you've made on spend­ing because we're–it isn't–if it doesn't hap­pen in 2011, it isn't going to hap­pen in 2012 and it isn't going to happen...

JOE: I mean, it's–yeah. It's enti­tle­ments, War­ren. And there's a–there's a piece today...

BUFFETT: Yeah, sure.

JOE: ...I think it was in Politico, peo­ple in this country...

BECKY: Yeah. In the Tar­rance Group poll, right?

JOE: Yeah. Peo­ple still think...

BECKY: The–yeah.

JOE: ...that you can cut waste and save, or they think you can cut defense, that we're spend­ing all the money on defense. And it...

BECKY: Here's the num­bers on the...

JOE: Yeah. What is it, Beck?

BECKY: The num­bers on that poll that Joe's ref­er­enc­ing is a major­ity of vot­ers incor­rectly believe the fed­eral gov­ern­ment spends more on defense and for­eign aid than it does on Medicare and Social Security.

BUFFETT: Yeah.

BECKY: Sixty-three per­cent of peo­ple they polled thought that. Another 60 per­cent incor­rectly believes prob­lems with fed­eral bud­gets can be fixed by just elim­i­nat­ing waste, fraud and abuse.

BUFFETT: Yeah.

BECKY: And it's not just casual beliefs on this. Forty per­cent of them strongly agree with these beliefs. Less than half of them, just 44 per­cent, believe that Medicare, Social Secu­rity are the major source of prob­lems for the fed­eral bud­get. Only 49 per­cent dis­agree. So what–how do politi­cians deal with poll num­bers like that?

BUFFETT: Well, they deal with it by ignoring–essentially ignor­ing the prob­lem. I mean, it's the same prob­lem you had with state and munic­i­pal­i­ties on pen­sions. It was so easy–it was easy for Gen­eral Motors back in the '60s to promise pen­sions and health ben­e­fits that later, you know, brought the com­pany to bank­ruptcy. It's–it was easy for state and munic­i­pal­i­ties, you know, in–when they were nego­ti­at­ing con­tracts 20 or 30 years ago to put in cost of liv­ing adjust­ments and retire­ment after 20 years and back-end load­ing in terms of the last few years of employ­ment. And all of those things and those promises come due so much later, long after the politi­cians left office, that it's a tremen­dous prob­lem. But the future does arrive. And when the future arrives and you've made a lot of promises, you're either going to break the promises, you're going to raise taxes dra­mat­i­cally, or you're going to inflate. And basi­cally, I think...

BECKY: So wait a sec­ond. Are you on the side of some of the Repub­li­can gov­er­nors right now who are say­ing, `We can't afford to keep up with the promises we've made, we cer­tainly can't con­tinue these promises down the road,' and, in some cases, as in the case of Scott Walker, say­ing, `We need to get rid of col­lec­tive bar­gain­ing as a result'?

BUFFETT: Well, I think–I don't want to–I'm not going to say about the col­lec­tive bar­gain­ing. I do think that many states and municipalities–including Omaha, we just have had this–have made promises on ben­e­fits that really can't be ful­filled if you con­tinue to keep mak­ing them. I think it's–listen, I would iden­tify with the munic­i­pal employee who said, `Look, if you made the deal with me. I mean, you know, I came to work here because you said I was going to get this.' So–but I–the one thing I think you do is you quit mak­ing new promises. I mean, you may–you may have–be able to ful­fill the ones that you've got up to this point, but you say, `Look it, this is going to bust us. And I'm going to make no more new promises.' And, you know, that's a tough thing for a politi­cian to say.

JOE: War­ren...

BECKY: What about asking...

JOE: If the pub­lic employ­ees at the state and local lev­els are installing the peo­ple that give them the ben­e­fits through col­lec­tive bar­gain­ing, maybe that's some­thing you need to change.

BUFFETT: Well, I–yeah, but you could say every con­stituency sort of votes its own inter­ests. I mean, you know, there–you've got people–you've got the rich cap­i­tal­ists who are try­ing to keep down the rate on cap­i­tal gains, and...

JOE: Yeah, but those–but those–yeah, but those com­pa­nies can go bank­rupt. I mean, the pri­vate unions are nego­ti­at­ing with...

BUFFETT: Yeah.

JOE: If they get too much, they know that they won't have a job any­more. The oth­ers are negotiating–or they're aligned against the tax­pay­ers. The states and the local munic­i­pal­i­ties can never go bank­rupt. So they–you know, that's why there's no rea­son for them to mit­i­gate their demands, right?

BUFFETT: Well, peo­ple are going to make the best deal they can. I mean, when you–you know, when you come up to nego­ti­ate your next con­tract with CNBC, you'll try and make the best deal you can. But you've got to have peo­ple on both sides–and hope­fully you've got peo­ple on both sides that are math­e­mat­i­cally intel­li­gent. And, of course, the big prob­lem, you know, with pen­sions, with postre­tire­ment med­ical care and all of that, is that the guy that makes the promise is not the guy that has to make the pay­ment. Yeah.

JOE: You saw–Welch yes­ter­day, War­ren, brought–and it was in the Jour­nal, too, brought up a speech given by Corzine–Governor Corzine in 2006 to the pub­lic unions that said, `We are going to fight for a bet­ter set of ben­e­fits for you.' He was the guy giv­ing the ben­e­fits to the public–how do you nego­ti­ate with some­one who's giv­ing a speech say­ing, `We're going to give you'–and he knows that that might help him get elected the next time, hav­ing the pub­lic unions on his side?

BUFFETT: Yeah. Well, I haven't read that speech, but if it says what you said, it was a mis­take. It was a big mis­take. I–yeah, and not only that, but they use unre­al­is­tic assump­tions even in deter­min­ing how much they have to put in the pen­sion funds to meet the oblig­a­tions. I mean, the pen­sion fund assump­tions of most munic­i­pal­i­ties, in my–in my view are nuts, you know. And–but there's no incen­tive to change them. I mean, it's much eas­ier to get a friendly actu­ary than it is to face, you know, an unhappy public.

BECKY: Well, so who's right? Because this has got­ten to be such a huge debate, and you have two sides that are paint­ing two very dif­fer­ent pic­tures and using two very dif­fer­ent sets of num­bers to say how bad of a sit­u­a­tion dif­fer­ent munic­i­pal­i­ties, dif­fer­ent states are in at this point. Who do we believe? Is there a set of num­bers that tells the absolute truth?

BUFFETT: Well, I–actually, I've seen some pretty good num­bers on that. But the–I would say that when they have pen­sion assump­tions that assum­ing they're going to earn 8 per­cent or some­thing like that when bonds are yield­ing what they are now, you know, that's crazy. And...

BECKY: I told some­body that who deals with pen­sion funds a cou­ple of weeks ago, and they said, `Well, you're just wrong because if you look at where things could go over the next 10 years, you're just wrong.'

BUFFETT: Yeah.

BECKY: What's a safe assump­tion for pen­sion returns?

BUFFETT: Well, I use–we're required, with our util­i­ties, to use cer­tain pen­sion assump­tions I don't want to use. But we've used about as low as–anyway, but I think this. I think that–well, I think it's non­sense, for exam­ple, when a com­pany has sub­sidiaries in Europe and then they have them here, and they have an assump­tion for their pen­sion fund in Europe that says we're going to earn 4 per­cent over there and we're going to earn 8 per­cent in the United States. I would say let's give the money to the United States. The pen­sion fund account­ing has been ter­ri­ble over the years. And many man­age­ments, I don't think, under­stand it very well them­selves, and many, you know, in a sense pre­fer not to under­stand it. You know, they care about their own pen­sion, too.

We could–we could use a real over­haul of pen­sion assump­tions in this coun­try. There's been some of that, but I've been writ­ing about it for years. You know, it–nobody's really got an incen­tive to do it, you know, that's one of the prob­lems. But...

BECKY: Mm-hmm. But it sounds like you do have some sym­pa­thies with some of the Repub­li­can gov­er­nors who are try­ing to make slashes.

BUFFETT: Well, I have sym­pa­thy for any­body that's try­ing to deal finan­cially today with a whole bunch of promises made by some­body years ago.

BECKY: Yeah.

BUFFETT: But I also have sym­pa­thy for the guys that said, `Lis­ten, I took the job because of those promises.'

BECKY: Sure. Right. And 40 years later, these are the promises that were made.

BUFFETT: Yeah.

BECKY: What about the idea of ask­ing state employ­ees to play***(as spoken)***20, 30, 40 per­cent of their health care costs from here on out?

BUFFETT: Yeah. Well, some of them–actually, there's more con­trib­u­tory pay­ments into pen­sion funds in the–in the pub­lic arena than in the pri­vate arena. If you look at the old...

BECKY: I mean in health care, in health care situations.

BUFFETT: Yeah, well...

BECKY: There's a lot–that's where some of the stick­ing points are, too.

BUFFETT: ...that's chang­ing the promise. You know, and I–and it's very tough. But I think we have done that in some of our pri­vate plants at Berkshire.

BECKY: Mm-hmm.

BUFFETT: And I think that–but when you're doing it, you're break­ing a promise. I mean, peo­ple worked for 30 years in an auto plant or some­thing of the sort, and they said you're going to have your health care taken care of when you're–when you're out of here. And then if you say you're going to pay 30 per­cent of it, that's–that is chang­ing the game some­what. I think absolutely they ought to change the game on–from this point for­ward, I mean, in terms of hires they're mak­ing and, you know. And if some­body wants to leave the pub­lic sec­tor because now they're not going to get ben­e­fits from this point for­ward because they–fine, let them do it. But I–every year that ticks away on this stuff, you know, the oblig­a­tion gets larger.

CARL: And, War­ren, just on that...

BECKY: Mm-hmm. Carl:

CARL: ...I won­der, I mean, the prob­lems we're talk­ing about are so huge, so struc­tural, right, so intractable, how do you rec­on­cile them with the opti­mism in your let­ter, and the notion that America's best days are ahead?

BUFFETT: Because...

CARL: Because a lot of the peo­ple who read the let­ter and are skep­ti­cal of mar­kets, skep­ti­cal of gov­ern­ment, say the points you're mak­ing prove that we may not actu­ally be able to win this time.

BUFFETT: Oh, we'll win. We'll win. I mean, bear in mind this: You can make promises about what will hap­pen in 2020 to some­body, but you–we can't eat the food that's going to be pro­duced in 2020, we can't use the cars. As long as the econ­omy grows, we will have a larger pie. The prob­lem is we've promised so much of that pie away to dif­fer­ent peo­ple. But as long as the pie grows, you know, over­all the coun­try will do well. We'll have enor­mous ten­sion between var­i­ous classes of peo­ple. But if you go back to when I was born in 1930, just look at what you could've pre­dicted. You could've pre­dicted, you know, that stocks would go down–from the moment I was born, they'd go down another 75 per­cent. You could pre­dict 25 per­cent unem­ploy­ment. You could pre­dict a sur­prise attack, you know, that looked like we were going to lose the war in 1941. All of these things hap­pened. And what hap­pened in 1941? You had an econ­omy that'd been kind of mori­bund through the '40s–or through the '30s, and every­body went back to work and we were turn­ing out bat­tle­ships, we were turn­ing out planes.

This coun­try has enor­mous poten­tial, and we will be turn­ing out more goods and ser­vices per capita five or 10 years from now than we are now. The prob­lem is whether we've over­promised those to too many par­ties. The pie will get big­ger, and that is a huge advan­tage over time. And it just means that the mem­bers of the fam­ily fight over who gets how much of the pie, and maybe part of that pie has been over­promised to peo­ple. But the pie get­ting larger solves a lot of things; and it solved things from a cou­ple hun­dred years in this coun­try, and it'll con­tinue to do so.

BECKY: War­ren, we got lots and lots of ques­tions that came in from Berk­shire share­hold­ers, from view­ers. We also got one that came in from Mohamed El-Erian, who I know you're friends with, too. He asks a broad ques­tion that talks about this high unem­ploy­ment rate. Let's call this up right now. It's, "The per­sis­tence of high unem­ploy­ment and, within that, large youth unem­ploy­ment, is lead­ing some to worry about skill atro­phy, exper­tise mis­matches and lower future pro­duc­tiv­ity. So how valid are these con­cerns? And if they are valid, what should the gov­ern­ment and com­pa­nies do to try and counter this trend?"

BUFFETT: Yeah. Well, actu­ally, productivity's been ter­rific in the last few years.

BECKY: Mm-hmm.

BUFFETT: I mean, that's the rea­son that we are doing a lot more busi­ness than a year ago and we only have 1 per­cent more employ­ees. We're–productivity has improved very sig­nif­i­cantly. And, you know, that's–that–if pro­duc­tiv­ity hadn't improved, though, we'd have–we'd have less unem­ploy­ment right now.

BECKY: Mm-hmm.

BUFFETT: But pro­duc­tiv­ity is great over time. It's ter­ri­ble for the guy that loses his job because somebody's fig­ured out a machine that does it bet­ter, given time, but we want gains in pro­duc­tiv­ity. They give us more out­put. More out­put is what really solves prob­lems over time. We want more out­put per capita. Then we'll fight like hell about who gets it, you know. And the rich peo­ple say, `Well, we don't want you to take any of that away from us.' And other peo­ple say, `We've been promised it.' And you'll have all these fights about it. But hav­ing more out­put solves a lot of thing. A fam­ily that has greater and greater income may still have fights within the fam­ily about who gets to spend it, but it's–those fights are a lot eas­ier to solve than if the income is shrinking.

BECKY: Let me ask you a ques­tion that was sent in by a viewer. This is–control room, I'm jump­ing out of order–number six from Mark in Illi­nois. And this was writ­ten tongue in cheek, but he says, "You and Bill Gates have recently been try­ing to get extremely rich indi­vid­u­als to give half their wealth to char­ity. I was won­der­ing about all the con­cern over our nation's seri­ous debt issue. If the US cit­i­zens on the Forbes 400 list gave half their wealth to pay­ing down the debt, how much of a dent would you put in it?"

BUFFETT: Well, the Forbes 400 had, I think, about 1.3 tril­lion last year, so that'd be about 650 bil­lion. So in terms of the–in terms of the net debt, it would knock off about 7 or 8 percent.

BECKY: So you are talk­ing about a seri­ous dent with that. And I guess the ques­tion he maybe is ask­ing in a more round­about way is, why not give that money to the gov­ern­ment instead of pri­vate charities?

BUFFETT: It would–it would–it would take about–it would wipe out about six months of the deficit, and then we'd back–we'd be back where we started. I do think that that group should be pay­ing much higher taxes than they are, you know, and I think they–there should be higher estate taxes, too. But I don't think–I don't think you should have a tax sys­tem based on free will con­tri­bu­tions. I'm not sure that would be the most suc­cess­ful tax sys­tem ever devised.

BECKY: OK. All right, well, we do have more to come. In fact, when we come back, we'll have a final go-round with War­ren Buf­fett, a rapid-fire ses­sion to get through some of your last ques­tions, and ours as well. SQUAWK BOX will be right back.

***

BECKY: Wel­come back, every­body. It's time for a final round with War­ren Buf­fett, so let's get right to some of the e-mails that you've been send­ing in. And, War­ren, the ques­tions that came in this year were extremely thought­ful. One that came in from Duane in Tri­bune, Kansas, writes in, "What do you think about the rapidly increas­ing prices paid for farm­land across the coun­try, and where do you see this trend going?" BUFFETT: Well, my son is the farmer, and I'm not the big expert on it. But obvi­ously, com­mod­ity prices have gone up sig­nif­i­cantly. And if they...

BECKY: Mm-hmm.

BUFFETT: If that rep­re­sents a per­ma­nent fac­tor, I mean, if you're really talk­ing about $7 corn and $12 soy­beans and so on, it makes the farm­land worth more money. And of course, farm­land does become more pro­duc­tive year after year. So, you know, a farm is a decent long-term invest­ment. Gen­er­ally they've sold on the fairly low yield basis, but good farm­land is not a ter­ri­ble investment.

BECKY: Yeah. You've seen prices crash, though, for some of these things very rapidly before.

BUFFETT: I don't know what will hap­pen with commodities.

BECKY: Yeah.

BUFFETT: But what you're see­ing with com­modi­ties to some extent is the–is the con­verse to the–to paper money. I mean, it...

BECKY: Mm-hmm.

BUFFETT: If money becomes worth less and less, cop­per and cot­ton and soy­beans are going to be worth more and more, mea­sured by dollars.

BECKY: Mm-hmm. Let's get to another ques­tion. Lind­say writes in from Cedar Rapids that, "Risk man­agers within many firms got it wrong, as evi­denced by the finan­cial fail­ures and required gov­ern­ment bailouts. Beyond the answer of main­tain­ing a strong cap­i­tal posi­tion like that of Berk­shire Hathaway–obviously, not every com­pany has the bal­ance sheet of Berkshire–what's the most impor­tant advice you can pro­vide with regard to risk man­age­ment so that com­pa­nies don't repeat the finan­cial fail­ures of the recent past?"

BUFFETT: Yeah, Well, finan­cial com­pa­nies always have–the CEO has to be the chief risk offi­cer. And I think the boards of direc­tors should have com­pen­sa­tion poli­cies that make sure that if the CEO fails in the risk job that that CEO goes away poor. I mean, I think that it's been dis­gust­ing, frankly, with huge finan­cial insti­tu­tions having–needing gov­ern­ment assis­tance, all the dis­rup­tion that's caused both in the insti­tu­tions, the econ­omy and every­thing else, and peo­ple walk­ing away rich. So incen­tives mat­ter enor­mously, and incen­tives have all been to the upside with man­agers. I mean, you have stock options, all of these things that if it works out they do great, and if it doesn't work out they still are very rich and they leave and, you know, it's good­bye, and then you need gov­ern­ment money. So I think boards have been very derelict in the big finan­cial insti­tu­tions in the way they designed com­pen­sa­tion pack­ages. But they've been encour­aged to do so by comp con­sul­tants and just by pre­vail­ing practice.

BECKY: Can we count on any­thing the gov­ern­ment may do or has tried to do to this point with stop­ping that, or is this just always going to be a tick­ing time bomb?

BUFFETT: Well, the two big prob­lems of the period were lever­age and bad incentives.

BECKY: Mm-hmm.

BUFFETT: They've done some things about lever­age, quite a bit. And the temp­ta­tion is always just to lever­age up more and more if you've got a finan­cial insti­tu­tion. If you're–if you've got a gov­ern­ment guar­an­tee behind you, in effect, which the FDIC has been, or with Fred­die and Fan­nie, you can print money. And when peo­ple get the abil­ity to print money, they enjoy it. And then when you get the incen­tives wrong so that if things work they get paid off incred­i­bly, and if things work they still get paid off incred­i­bly, it–you're going to–you're going to have peo­ple do crazy things. So you got to have the incen­tives right, and you've got to have some lim­its on leverage.

BECKY: All right, we've only got...

BUFFETT: And we've made some progress on that.

BECKY: We have made some progress.

BUFFETT: Yeah.

BECKY: We've only got a few min­utes left, but I'm hop­ing you can solve the prob­lem with Fan­nie and Fred­die and home mort­gage issues while you're here. You did write about that in the share­hold­ers let­ter this year.

BUFFETT: Hm.

BECKY: You wrote about your expe­ri­ences through Clay­ton, and why Clay­ton has not had the types of bad loans that we've seen so preva­lently through other areas in home mortgage.

BUFFETT: Yeah. Yeah. Well, we lent to peo­ple who put up rea­son­able down pay­ments, and we ver­i­fied their income. And these were peo­ple liv­ing on the edge, in many cases. I mean, these were not peo­ple with great FICO scores, every­thing, but they were buy­ing homes not to flip them, they were not refi­nanc­ing to try and take the money out to–they were–they were–they were keep­ing their monthly pay­ments in line. And we were keep­ing the mort­gages. We kept 11 bil­lion or so of mort­gages, three–200,000 of them. So we cared whether the peo­ple were going to pay us in the future. If you have a government-guaranteed mort­gage, you know, you don't care whether the person's any good or not. I mean, you know–well, you care whether the government's good or not, but you don't care. So when Fred­die and Fan­nie guar­an­teed mort­gages, the only per­son that could care was Fred­die and Fan­nie. The peo­ple that bought them knew they were going to get paid because they knew, in effect, they were gov­ern­ment guar­an­teed. Now, hav­ing gov­ern­ment guar­an­tees in there brings down the cost of financ­ing to rock-bottom lev­els. I mean, it does reduce the cost of home­own­er­ship because you've got a government-guaranteed obligation.

I think going forth in the future, you may need some sys­tem where pri­vate guys–guys like me, guys like JPMor­gan or whomever–have large mort­gage guar­an­tee oper­a­tions back­stopped by the fed­eral gov­ern­ment. So you get the ben­e­fit of the cost of that, but you have the dis­ci­pline of the pri­vate mar­ket in terms of pric­ing these things and deter­min­ing what you take and don't take. And you get it away from con­gres­sional pressure.

BECKY: So that noth­ing like a Fan­nie or a Fred­die exists?

BUFFETT: You–I don't think you nec­es­sar­ily need Fan­nie or Fred­die, but what you might–you might–let's just say you had a com­pany cap­i­tal­ized at $10 bil­lion and we own it. We couldn't take any money out of it for at least five years. And we guar­an­teed mort­gages, and we took 80 per­cent of the guar­an­tee, and the fed­eral gov­ern­ment took the 20 per­cent. But the gov­ern­ment also said if for any rea­son this $10 bil­lion com­pany couldn't pay, they would pay. Now, we would have an inter­est in get­ting decent loans, we'd have an inter­est in get­ting paid rea­son­ably. The gov­ern­ment guar­an­tee would prob­a­bly never be called on, it would keep the price low. So you get the dis­ci­pline of the pri­vate mar­ket, and you wouldn't have a whole bunch of lob­by­ists com­ing around to us and say­ing, `We want you to give money to any­body that shows up and, you know, can show a faint pulse.'

BECKY: Do you–do you think that that's actu­ally a likely sce­nario, though? Do you think that there's the polit­i­cal will or desire to get the gov­ern­ment entirely out of it?

BUFFETT: Well, I think–I think there's desire to get some answer to Fred­die and Fan­nie. They all want to sweep it under the rug. It's the only thing, inci­den­tally, that's cost the gov­ern­ment a lot of money out of this whole panic.

BECKY: Right.

BUFFETT: The banks have pretty well paid things back, the FDIC didn't have to come up for any money, and the–even Gen­eral Motors is doing rea­son­ably well. So–AIG is going to get the money paid back. The big losers are Fred­die and Fan­nie. And they were the ones run by gov­ern­ment, and they were sub­ject to gov­ern­ment pres­sures. So I think that there's a desire for a solu­tion that keeps the cost down–which gov­ern­ment guar­an­tees, too–but also imposes mar­ket discipline.

JOE: Hey...

BECKY: Joe:

JOE: Hey, War­ren, is too big to fail–we keep hear­ing that it–that that wasn't fixed, that obvi­ously the banks have got­ten even big­ger, the big ones. If you get their–the lever­age bet­ter in order and make them, you know, keep more cap­i­tal, and if you get the com­pen­sa­tion or the incen­tives in order, is it OK to–in a cap­i­tal­ist sys­tem, to have things that're too big to fail, that would be bailed out? I–it seems like that's still a prob­lem and we still have it.

BUFFETT: Yeah, you don't–but you don't want to bail out the man­age­ments. I mean, you know, in the case of–you know, Fan­nie and Fred­die stock­hold­ers lost all their money. You know, the–AIG and Citi, you know, they're down–I don't know whether they're down 80 per­cent or what. The stock­hold­ers at WaMu lost all their money. The stock­hold­ers at Wachovia lost a very high per­cent­age of their money.

JOE: Yeah.

BUFFETT: So they failed. Now, the–they didn't fail in the sense that you had a liq­ui­da­tion sale.

JOE: Right.

BUFFETT: And we tried that with Lehman and that didn't work out too well. There will always be, in my view, places that're too big to fail. But you could make it so that the incen­tives are that the peo­ple run­ning them, if they...

JOE: Right.

BUFFETT: ...if the insti­tu­tion fails, they fail. That's enor­mously impor­tant, in my view.

CARL: War­ren, I don't know if you saw...

BECKY: Carl:

CARL: I don't know if you saw the Oscars this past week­end, but the win­ner of Best Doc­u­men­tary was this film called "Inside Job," which paints a very dark pic­ture of the cri­sis. And in his accep­tance speech, the pro­ducer said that the–three years after a cri­sis that he says was caused by a mas­sive fraud, in his words, not a sin­gle exec­u­tive has gone to jail, and he says that's wrong. Is it?

BUFFETT: Well, I would say that what's really wrong is that the chief exec­u­tives of most those com­pa­nies walked away extra­or­di­nar­ily rich. Now, whether they should've gone to jail or not's a–you know, that's a ques­tion of statutes and whether you could prove it and so on. But I think the idea that they were allowed, by the terms of their con­tracts that they'd made and the boards of direc­tors allowed to be put into place, that they could walk away with hun­dreds of mil­lions of dol­lars while the coun­try suf­fered the con­se­quences of really some ter­ri­ble actions. Like I said, I don't know whether it should put them in jail, but it should–it should not put them in Cadillacs.

BECKY: And, War­ren, just wrap­ping things up again quickly, you are incred­i­bly opti­mistic not only about America's futures, but about the stock market's future. Is that fair to say?

BUFFETT: I think–I think–I would–certainly fair to say that I would–if you asked me for own­ing equi­ties vs. fixed dol­lars, either long-term or short-term...

BECKY: Mm-hmm.

BUFFETT: ...gov­ern­ments or any­thing, I know–I don't think there's a chance that gov­ern­ments will out­per­form equi­ties over any, say, 10 or 20 or 30-year period. So I...

BECKY: Even with the big runs we've seen recent–oh, you're look­ing over the longer term. Yeah.

BUFFETT: Yeah, over the longer–I have no idea what'll hap­pen in the next year.

BECKY: OK.

BUFFETT: But the–but I think it would be very, very fool­ish to have your money in long-term fixed-dollar invest­ments or short-term fixed-dollar invest­ments when you could–if you had the abil­ity to own equi­ties and own them for a–and hold them for a con­sid­er­able period of time. You shouldn't own them with bor­rowed money.

BECKY: OK. Well, War­ren, again, we want to thank you very much for your time here today, for being so gen­er­ous with your time and tak­ing so many of our ques­tions and so many of our viewer ques­tions as well.

BUFFETT: OK. I hope your view­ers come out and look at the Durham Museum some­time, you know, enjoy it.

BECKY: That's right. Again, we're at the Durham Museum, for any­body who missed it. We're stand­ing in front of the Ernest Buf­fett gro­cery store. Ernest Buf­fett, of course, was War­ren Buffett's grand­fa­ther. And if you haven't read it already, check out the annual let­ter that he wrote. It tells you a lit­tle bit about a les­son that his grand­fa­ther taught him. But again, War­ren, thank you.

BUFFETT: Thank you.

BECKY: Appre­ci­ate it. And, Carl, we'll send it back over to you.

CARL: OK. All right, thanks to War­ren from both me and Joe.

JOE: Thank you, War­ren. Yes.

Tags: BRIC, BRICs, Canadian Market, China, Commodities, Currency, energy, ETF, Gold, India, oil, Oil Sands
Posted in Canadian Market, Commodities, Credit Markets, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook | Comments Off

Future of the BRICs

Tuesday, March 8th, 2011

For sev­eral months, devel­oped mar­kets have out­per­formed emerg­ing mar­kets and for four years now the BRICs group­ing (Brazil, Rus­sia, India and China) has done no bet­ter than emerg­ing mar­kets gen­er­ally. FT Lex’s John Authers and Vin­cent Boland look at the future of the Brics invest­ment strat­egy and the alternatives.

Click here or on the image below to watch the video.

Source: Finan­cial Times, March 7, 2011.

Tags: Brazil, BRIC, BRICs, China, Emerging Markets, India, Russia
Posted in Brazil, Emerging Markets, India, Markets | Comments Off