On real estate
Buffett: "A lot of the
psychological well being of the American public comes from how well they`ve done
with their house over the years. If indeed there`s been a bubble, and it`s
pricked at some point, the net effect on Berkshire might well be positive
[because the company`s financial strength would allow it to buy
real-estate-related businesses at bargain prices]....
"Certainly at the high end of the
real estate market in some areas, you`ve seen extraordinary movement.... People
go crazy in economics periodically, in all kinds of ways. Residential housing
has different behavioral characteristics, simply because people live there. But
when you get prices increasing faster than the underlying costs, sometimes there
can be pretty serious consequences."
Munger: "You have a real
asset-price bubble in places like parts of California and the suburbs of
Washington, D.C."
Buffett: "I recently sold a house
in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a
twentieth of an acre, and the house might cost about $500,000 if you wanted to
replace it. So the land sold for something like $60 million an acre."
Munger: "I know someone who lives
next door to what you would actually call a fairly modest house that just sold
for $17 million. There are some very extreme housing price bubbles going
on."
The trade deficit and the value of
the dollar
Buffett: "That really is the
$64,000 question. It seems to me that a $618 billion trade deficit, rich as we
are, strong as this country is, well, something will have to happen that will
change that. Most economists will still say some kind of soft landing is
possible. I don`t know what a soft landing is exactly, in how the numbers come
down softly from levels like these....
"There are more people [like
hedge-fund managers] that go to bed at night with a hair trigger than ever
before, it`s an electronic herd, they can give vent to decisions that move
billions and billions of dollars with the click of a key. We will have some
exogenous event, we will have that. There will be some kind of stampede by that
herd....
"When you have far greater sums
than ever before, in one asset class after another, that are held by people who
operate on a hair-trigger mechanism, then they lend themselves to more explosive
outcomes. People with very short time horizons with huge sums of money, they can
all try to head for the exits at the same time. The only way you can leave your
seat in burning financial markets is to find someone else to take your seat, and
that is not always easy...."
Munger: "The present era has no
comparable referent in the past history of capitalism. We have a higher
percentage of the intelligentsia engaged in buying and selling pieces of paper
and promoting trading activity than in any past era. A lot of what I see now
reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and
imitation. It has happened in the past that there came bad
consequences."
Buffett: "I have no idea on
timing. It`s far easier to tell what will happen than when it will happen. I
would say that what is going on in terms of trade policy is going to have very
important consequences."
Munger: "A great civilization will
bear a lot of abuse, but there are dangers in the current situation that
threaten anyone who swings for the fences."
Buffett to Munger: "What do you
think the end will be?"
Munger: "Bad."
Buffett: "We`re like an incredibly
rich family that owns so much land they can`t travel to the ends of their
domain. And they sit on the front porch and consume a little bit of everything
that comes in, all the riches of the land, and they consume roughly 6 percent
more than they produce. And they pay for it by selling off land at the edge of
the landholdings that can`t see. They trade away a little piece every day or
take out a mortgage on a piece.
"That scenario couldn`t end well.
And we, also, keep consuming more than we produce. It can go on a long time. The
world has demonstrated a diminishing enthusiasm for dollars in the last few
years as they get flooded with them – every day there`s $2 billion more going
out than in. I have a hard time thinking of any outcome from this that involves
an appreciating dollar.
[But, Buffett later added, he is
not predicting an end to U.S. economic power.] "If you have a good business in
this country that`s earning dollars, you`ll still do okay. Twenty years from
now, a couple percentage points of GDP may go to servicing the deficit, but
you`ll do fine.... I don`t think trade deficits will pull down the whole place;
the country will survive those dislocations. I`m not pessimistic about the U.S.
at all.... We have over 80 percent of our money tied to the dollar. It`s not
like we`ve left the country." ...
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