Buffett sees economy in 'shambles' but holds out hope

Master investor Warren E. Buffett warns today in his annual letter to shareholders that the economy "will be in shambles throughout 2009 -- and, for that matter, probably well beyond."

But as he has done several times in recent months, Buffett tries to rally hope, insisting that "America's best days lie ahead" despite the current economic crisis.

As usual, the billionaire's letter to his Berkshire Hathaway Inc. investors mostly reviews the company's operations and investments. Berkshire's businesses include insurance, utilities, manufactured housing and retailing, and the company also is a major shareholder of firms including Coca-Cola, Wells Fargo & Co. and Kraft Foods.

Buffett also gives his views on the broader economy, and on the government's attempts to fix the mess we're in.

The "debilitating spiral" in the financial system and economy "has spurred our government to take massive action," Buffett notes. "In poker terms, the Treasury and the Federal Reserve have gone 'all in.' Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel."

Buffett, a Democrat, says the government's moves were necessary to avoid a "total breakdown." But he predicts that "these once unthinkable dosages [of financial help] will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation." . . .

"Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests," he says. "Weaning these entities from the public teat will be a political challenge. They won't leave willingly."

Still, Buffett writes, "Amid this bad news, never forget that our country has faced far worse travails in the past," citing the two World Wars, the Great Depression, and the wild inflation of the 1970s.

"Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."

He makes no short-term prediction about the stock market, which is off to a horrendous start this year, with the Standard & Poor's 500 index down 18.6% since Dec. 31. But he notes that in 75% of the past 44 years, the S&P index has risen. "I would guess that a roughly similar percentage of years will be positive in the next 44 years," he says.

Buffett, who publicly recommended buying stocks amid the meltdown in October, reiterates his view that investors who are hiding out in short-term cash accounts or long-term Treasury bonds will come to regret it. He suggests that the fear-driven rally in Treasury securities that pushed yields to record lows late last year is a massive bubble on par with the dot-com bubble and the housing bubble.

"Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long," Buffett writes. "Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

-- Tom Petruno

Photo: Warren E. Buffett

Comments

[douglaspacheco]

Berkshire Hathaway mills made millions of dollars on the backs of poor immigrants, paying very poor wages and taking advantage of poor people that where willing to work on piece work and every time a worker found a way to work faster they would raise the bar so they did not have to pay the worker any extra money . in my opinion he will find a way to take advantage of poor people again

[Misty]

People who criticize Mr. Buffett for saying 'buy' in October base their opinions on hindsight (that the market has gone down since then). His opinion has a better basis: seeing good relative value. Buyers at today's levels should consider themselves lucky.

[Edward Brewster]

The stock market itself is nothing more than a modification of a classic pyramid scheme. The only difference is that it does not break down it changes direction instead. The stock market resembles a pyramid scheme in that the price and value of stock is determined solely by volume of shares traded and by the number of buyers and sellers and nothing more. In owning a share of stock you actually own nothing more than a position in a pyramid scheme where big money moves the market and cleans up and the small investor is swept away and cleaned out. You are in no way connected to the Companies assets profits or losses. The only thing related to the Company that you own is the name of that company. It makes no difference whether or not the market is rising or falling. All depends upon which direction you are betting when you buy or sell. You buy long, you sell short. It's strictly gambling in a rigged system where you begin in the hole due to broker fees and buy and sell point spreads. The entire system is a swindle covered over in layer after layer of deception. This is not real money involving real creation of wealth. This is strictly gambling money. Madoff, Daffy Duck or Mr. Magoo? How funny.

[John]

As one whose 401k is entirely in cash now, I agree with him, but I plan to wait a few more months while we see how the bank situation clarifies. We are now bouncing around the November lows (and also the lows of earlier this decade), but I'd guess that another bad bank surprise in the next few weeks as they do the stress test could slam us down to 500-600 on the S&P500.

[Abraham]

Where is Warren B's loyalty? His shareholders? or God and Country? Buffet is a global financier and his message of Hope is more globalization and keep the Private Central Banks out of the maelstrom. The former USA is now referred to as a nation state by this crowd of Zionists who are engineering the end of Nationalism and the rise of new beasts like the european union and the north american union. ZWO is a neofascist movement which purports to sell itself as a neo socialist movement. AIPAC and private armies along with the FEMA restructuring are moving into striking range in a focused and expedited campaign. They fear your access to the Internet, they fear your right to assemble and bear arms. They fear many will follow Gandhi and solidarity movements and stay home and organize labor strikes.

[Paul D. Humphries]

I found it extremely interesting that using military cryptologic techniques to decode the Four Horsemen of the Apocalypse proved to be an eye opener. The book was completed in 1986, and predicted the fall of the Soviet Union and a world economic depression would follow a few years later. The world depression would be caused by extreme debt, and a superwealthy cabal controlling the credit market. Oil would sell for over $50 a barrel. There would be diseases in the beef, pork, and poultry industries. There would be economic warfare, which in turn, will bring on World War III. WWIII will be an eugenic war. So far, most of the predictions in the book A Dragon This Way Comes, have come true, and it looks like the others will come true.

[pugtv]

Edward Brewster,

I suggest you get off the meds and go back to school.

[Matthew]

You're lunatics, most of you.... what happened to normal and insightful people commenting here. I see little other than crazy, schitzophrenia-inspired babbling. Also, douglaspacheco get your facts right... Berkshire Hathaway has nothing to do with the textile company I assume you're referring to. That's Berkshire Industries. there's no relation.

[Joel]

Once again Mr. Buffet is correct. It's not the end of the world but a series of challenges we must overcome. I always remember a simple quote I heard many years ago: "Courage is not the absence of fear but the ability to carry on despite it". Words to remember. The best is truly yet to come. I believe that to the very core of my being.

And, to Matthew, your comment truly made me chuckle. Thanks for brightening my Sunday.

Peace

[Chris]

Amen Matthew. Why do we let crazys and weirdos write on these walls? Make a comment on the article, don't write some philosophical nonsense or obviously rediculous blabber.

Warren Buffet is the man and I will continue to soak in his knowledge as much as possible. American rules!

[Joe]

Warren Buffet has skirted the real issue.Should a system that allows 10% of the people to control 90% of the wealth be allowed to continue?? And do we in the USA want a democracy or a serfdom??

[LA-renter]

Edward Brewster... I agree.

The downturn has made this reality much more evident.

Interestingly, the failed effort to privatize Social Security was a cynical attempt to create fictional "gains" in the stock market, which would reward investment banking "geniuses" and pad the retirement of baby boomers, who entered the pyramid earlier.

Thank God that did not happen.