- Integer Investments
What does Warren Buffett think about the current market?
Updated: Apr 9, 2020
Warren Buffett is one of the most famous investors out there. He has been investing for many decades and achieved an extraordinary performance. He is also a well-regarded, rational thinker. I have personally read many books on his investing style, and all his annual letters to shareholders that offer good insights on investing in general.
I didn’t know he had recently been interviewed by CNBC Quick Becky. I listened to it today and I will try to summarize his thoughts, and put them in perspective of what we have been saying over the last ten days. If you are interested to watch the long version of the interview you can do it here (2 hours), if you are interested in the short version, it is below.
Buffett on markets long term
Regardless of the current situation, Buffett thinks that the
long term prospects of the economy have not changed because of the Coronavirus.
He also thinks that his businesses will do well in the next 20 or 30 years, regardless of the virus.
Buffett on banks
Banks are terrific businesses, especially compared to current returns on bonds. He thinks that US banks have been making good money in a low interest rates environment, but he seems to be more sceptical on international banks. In general, as long as banks don’t do dumb things, they will do fine long term.
"Generally speaking, but there are a lot of other variables too – but the banks are going to make more money if there are higher rates with a steeper curve. The curve is more important than the absolute level. But American banks have made very good money with very low interest rates. Around the world, if you look in the U.K. or Europe or Japan even lower rates have made it pretty tough for banks. The returns on equity are not as high. And they have to use more leverage to even get the same returns and I don’t like that as well."
Buffett on bonds
He doesn’t seem to be very positive on bonds:
The ten-year at 1.4% that means you’re paying 70 times earnings for something that can’t increase its earnings for ten years.
"If somebody came to you with a stock and said, you know, “This is a terrific stock. It sells at 70 times earnings. The earnings can’t go up for ten years,” you’d say, “Well, explain that to me again.”
We’ve never seen a situation like this in the world.
"Literally. I mean, you can go back and read Keynes and you can read Adam Smith and you can read, you know, all the great ones."
And they don’t talk about negative interest rates. It never crossed their mind.
"Always supply and demand and all these marginal costs. But brilliant economists never really anticipated that you would have negative – you’ve got 13 trillion or something like that – worldwide at negative interest rates. And we don’t know what that means. And we’ve got a lot of people that can speculate what it means. But ten years from now or fifteen years from now we’ll look back and say, “Well, it was obvious what would happen with that, and we’ll see it.” But it is not a normal situation. And well, interest rates are the basis of all value. I mean, you know, if you knew interest rates we’re going to be zero for 100 years you would think 1% was a great rate of return. But you also would know if you bought something was yielding 1% or that was what it paid and rates went to 8% you’d lose practically all your capital. So, it’s an enormous factor. And we don’t know the answer, central banks don’t know the answer. All we know is that it’s been useful in stimulating things, and particularly asset prices now for ten years and what we thought was temporary in 2008 and ’09 in the way monetary policy to stimulate we’ve just put our foot on the gas even further. The whole world has."
The problem is that now the U.S. 10-year treasury interest rates are even lower. The picture below shows that since Buffett’s interview has declined up to 0.5%, and now it is 0.83%.
But Buffett goes on.
"We--do not understand at all what the outcome will be - in a world where $13 trillion is being borrowed at less than zero. And even Greece went on short term and I think Greece, the ten year bond is 1%, for example."
This is very similar to what we have said. In our letter we wrote: "the current 10-year yield of 1.3% is the lowest of the last 200 years. European interest rates are negative, and as far as I know, this was a taboo until a few years ago. […] But think about it: why would I lend money to someone, and pay this person to take my money? I understand that inflation, future expectations and so on could explain this fact, but I struggle to find any sense in this.
In a few years we will look back and wonder what we were thinking.
"At the same time, in this country we’re having, under very good business and market conditions, we’re having a 4.5% federal deficit and nobody is concerned in the least. And we’re talking about massive new programs and so on. The deficit’s gonna widen."
So we don’t know what world comes out of something where you start with extremely low interest rates and high rates of growth. And then what you do for stimulus later on.
"But the whole game, I mean, the game always unfolds differently than you expect. And that’s what makes it so interesting."
It makes no sense to lend money at 1.4% to the U.S. government when it is government policy to have 2% a year inflation.
"I mean, you’ve got-- you’ve got--the government is telling you, “We’re gonna give you 1.4% and tax you on it. “And on the other hand, we’re gonna presumably devalue that money at 2% a year.” So these are very unusual conditions. What do people do under such circumstances? Does everybody buy a mattress and stick their money under the mattress or what? And it particularly seems unusual when the world is generally prosperous. But that’s the game is always changing. But it always looks logical in retrospect. And it always looks puzzling prospectively. But there’s always things to do that make sense too. "
But it’s hard to see that in 10-20 years from now we will have a substantial continuation of negative interest rates (but I have already seen things I didn’t think could happen).
In our letter we discussed government deficits and debt. We wrote “another factor is government debt […], should a recession arrive, governments not only will have a hard time investing for growth, but may face market turbulence (see the European debt crisis a few years ago). Clearly, central banks would need to step in.”
Buffett on insurance companies:
Low rates are good for stocks, but are bad for insurance companies. “The ones that really get hurt on it are either life or annuity companies that have promised returns. Property casualty business doesn’t promise returns. It still holds money, so it hurts them. But if you promise somebody an annuity that’s clearly to pay them 3% or 4% and now you find that you’re reinvesting your money at 1% or something, you know, you’re going to disappear.”
The interviewer then asks about increasing risks to get higher returns. And here it gets really interesting:
Well, they shouldn’t. I mean, the answer – if you need to get 3% and you’re only getting 1%, the answer is to quit giving 3%. It’s not to try and get the one up to three and do more dangerous things. You should always adapt your consumption to your income. You shouldn’t try and adjust your income to your consumption. That’s a basic principle for individuals, businesses and everything else.
Reaching for yield is really stupid. But it’s very human.
I mean, and I understand it. People say:
“Well, I’ve saved all this money all my life and now I can only get 1%. What do I do?” The answer is you learn to live on 1% unfortunately.
"And you don’t go and listen to some salesman come along and tell you, “I’ve got some magic way to get you 5%. People are reaching for yield, look at leveraged loans or loans with weaker covenants. There’s no question about that. And that’s stupid. And it has consequences over time. But it’s very human. It could have a big market impact. It could take a lot longer than you think. But eventually you get to midnight and everything turns to pumpkins and mice."
We wrote something very similar in our letter:
Over the years, central bank interventions affected market behaviour in a way that will emphasize any potential effect. Loose monetary policy has pushed investors to risk levels they are not ready to sustain. Think, for example, about pension funds (and pensioners). These are generally low risk and invest mostly in government bonds. The problem is that governments bond are yielding very small, even negative interest rates in Europe. Therefore, they had to invest in other assets such as real estate or lower rated bonds. Some others have invested in relatively safe companies such as Coca Cola to obtain a dividend yield of 3% [...] If we face a prolonged recession and a consequent stock market decline, the market will need to rebalance and price risk accordingly. This will be very painful. It is no surprise that this is the fastest market correction in history. We believe that if markets and central banks don’t normalize, something else will pop up in the future, the virus is just an excuse for markets to reassess the situation (quickly).
Yesterday one of our investors, a retired 78-year old, wrote me: "tell me what to do with all my liquidity please. I am not ready to accept a 2% yield". I have replied "safe bonds are the only investment that someone in your situation should invest in. Unfortunately, today, they all offer 0%. At the moment, all you can do is wait and sit tight."
Buffett on cryptocurrencies:
“I don’t own any cryptocurreny and I never will.”
There is no intrinsic value in cryptocurrencies. “The only logical move is go short in companies producing suitcases because they won’t be used to move money from one country to another.
Overall, we are perfectly in sync with Warren Buffett. As we have said multiple times, we live in a world of financial excesses. The markets will need to adjust and we will be ready to buy great stocks at favourable prices because, regardless of the current situation, good businesses will do well in the long term.
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