What is Warren Buffett's view on US economy?

June 25, 2019 10:50
Legendary investor Warren Buffett has talked about the ‘American Tailwind’, betting on continuing innovation and value creation by US enterprises. Photo: Bloomberg

From time to time, billionaire investor Warren Buffett shares his views on the US economy. When there’s a major crisis lying ahead, Buffett often can sniff out the problem and send a warning in advance to investors through his letters to shareholders.

For example, he wrote to his shareholders in 2007 before the financial turmoil that “our 76 operating businesses did well last year. The few that had problems were primarily those linked to housing and real estate brokerage operations... Some major financial institutions have experienced staggering problems because they engaged in 'weakened lending practices'. It is interesting that the industry has invented new ways to lose money.”

Buffett already felt something wrong before the meltdown of Lehman Brothers. “Unfortunately, all Americans came to believe that house prices would forever rise... confident that HPA - house price appreciation - would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.”

In another letter to shareholders in 1989, Buffett expressed concern about an extended rally in stock markets. "While the prices may not yet cause nosebleeds, they are clearly vulnerable to a general market decline... it would cause at least a one-year reduction in Berkshire's net worth. We think such a reduction is almost certain in at least one of the next three years.” His words become true in the second year.

Right now, lots of people are talking about a US recession, and wondering if the stock market rally had been overextended.

The US Federal Reserve has recently hinted that it could take up interest rate cuts. Is that a signal that the economy will head for recession? Will trade war drag the American economy down? Are equities too expensive right now? There are the questions passing through people's minds. 

Let’s hear what Buffett said.

In his most recent letter to shareholders in February, Buffett wrote in a final paragraph entitled “The American Tailwind” that “our country's almost unbelievable prosperity has been gained in a bipartisan manner...... Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend."

"Americans will be both more prosperous and safer if all nations thrive. Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky - gloriously lucky - to have that force at our back."

Apparently, Buffett was not worried about economic growth outlook or stock market valuations.

This article appeared in the Hong Kong Economic Journal on June 21

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal