Tuesday, 11 Dec 2007

Warren Buffett's Complete CNBC Interview: Video and Transcript (1 of 2)

Posted By:Alex Crippen

This is a transcript and video clip of the first part of Warren Buffett's live interview this morning on Squawk on the Street with CNBC's Becky Quick, in which he talks about the Federal Reserve, the U.S. dollar, the economy, and how his retail businesses are doing this holiday season.   

CLICK HERE FOR THE VIDEO AND TRANSCRIPT OF THE SECOND PART OF THE BUFFETT INTERVIEW

Becky:  I'm here with a very special guest today - Warren Buffett.  Warren, we know it's hard to get you out of Omaha, but very once in a while he does leave Nebraska.  Today's he's in San Francisco, and he's here for a very special cause, campaigning, or actually trying to raise money for Hillary Clinton who is running for president. 

We're going to get to all of that in a moment, but, Warren, first off, I just want to start off talking about the Fed.  We spoke last night, talked a little bit about what the Fed rate decision means.  Tell us again what it means to you as an investor.

Buffett:  As an investor, the Fed action today means nothing.  We will buy a stock that we like today if the Fed raised rates or if they lowered them 50 basis points.  We wouldn't sell anything based on it.  It just isn't important to somebody that's going to own a business, or a part of a business through a stock, what the Fed does.  If you were going to buy a farm today, if you were going to buy an apartment house today,  and you looked at it as a good investment, you would not sit around, you know, on pins and needles, waiting to see what the Fed did.

We bought Washington Post stock in 1973 and it's worked out over one-hundred for one and I don't know what the Fed was doing then.  So it's not a factor in our thinking on investment decisions.

Becky: Still,  when you're looking at broader issues, something like a bet on the dollar or against the dollar, as you've done in the past, it is something you have to pay attention to, what the Fed is doing.

Buffett: Well, it's a big macro factor.  The Fed is not the primary determiner of what happens to the dollar.   Now it's true that when you have a weak dollar like we do now, if they take the rates way down,  it will put more pressure on the dollar.  But the real determinant is the current account balance, the trade balance.  And over time, if you keep shipping two billion dollars a day out of the country, as we do of assets, you put pressure on the dollar and that's what's happened.

Becky:  There are some people who, for the most part all of the economists we've spoken to say they expect a 25 basis point cut from the Fed today.  There are some people, especially some market players, who are pushing for a 50 basis point cut.   Is there any risk to cutting that, especially when you look at all the bad news that's out there today?

Buffett: Well, there's some .. it does have some effect on the foreign exchange market.  But I really leave Fed policy to the Fed governors.  Easier money obviously stimulates the economy and it depends how much they think it needs stimulation.  But it will not make any difference.  If you buy or sell a stock today and you look back five years from now, the important thing will not be what the Fed did today.  The important thing will be what that company did.

Becky:  Well, what about the economy from your perspective?  How does it stand right now?

Buffett:  It's sort of amazing.  We have this enormous weakness in housing.  That effects an awful lot of people.  There's a wealth effect to it, everything.  So far, it hasn't spilled over into employment.  Now we have a set of dominoes in line that there could be some real effect from if unemployment rose.  But so far, you know, it's been at 4.7, well, it won't make any difference if it goes to 4.8 or 4.9, but if unemployment really took off, there are a lot of dominoes in the economy that probably would get hit by that. 

Becky:  What did you think about the jobs number that we got on Friday?  It was stronger than some economists had expected but not as strong as ADP had predicted.

Buffett: Well that's true, but it's still been amazingly strong when you think about what's going on in the housing-related industries.  I mean, we're in the brick business, we're in the carpet business, we're in insulation, we're in paint.  And those areas have really gotten hit.  So, you've got a situation where tens of millions of Americans feel poorer because they thought that their house would automatically appreciate every year.  And many of them have lived off re-fies.  That's been taken out of the picture.   So far it hasn't affected employment that much and if it doesn't I don't think we would have a recession, but if it does, I think there are some big dominoes out there.

Becky:  Now you mention that a lot of your businesses are very directly involved in this.  Everything from bricks to carpeting to insulation.  I know you speak with the managers of the companies pretty frequently.  What are they telling you?   Are things better or worse than they were six months ago?

Buffett:  Well, in the construction-related industries, I would say, if anything, they're worse.  And they weren't so hot six months ago.  I get daily figures around Christmas-time at all our retail operations, jewelry.  And what's happened there is right after Thanksgiving, you know, supposed Black Friday and all that,  sales were huge for a couple of days.  They've tapered off a lot and I'm adjusting for the calendar and everything.  But they've been pretty soft since those first couple of days.  So, we'll see what happens in the Christmas season, but I would say so far it is not looking very buoyant to me.

Becky: You know, Britt Beamer is one of the strategists and retail analysts we speak with every week.  He said that he thinks consumers are really holding out, waiting for big bargains.  They're not going to shop until that last weekend.

Buffett:  Yeah, well, they always do that.  They've been trained to do it.  But our retailers like to think that, and then every day I look at the figures and they haven't moved yet.  Every year there's a huge rush toward the end, particularly in something like jewelry, and I'm sure we'll get it, but I'm not so sure we're going to be beating last year's figures.

Becky:  That's the most concerning view I've heard from you as long as I can remember talking to you.

Buffett: Yeah, but .. We will have ... I hope I live long enough to see a couple of recessions in this country.  (Laughs.)  At your age, you'll see 6 or 7 in your lifetime.  It is the nature of capitalism to periodically have recessions.   People overshoot.  So, it isn't the end of the world.  I mean, as a matter of fact, for an investor, you know, it turns out to be the times when you make your best buys.  I made by far the best buys I've ever made in my lifetime in 1974.  And that was a time of great pessimism and the oil shock and stagflation and all those sort of things.  But stocks were cheap.

The real thing to look at is how much you're getting for your money and not worry about what they're going to do next year.  The American economy is going to do fine over time. 

Becky:  But when you start talking about that, are you comparing what's happening right now to 1974?

Buffett: No.

Becky:  Do you think prices are as cheap?

Buffett:  No, no, they're not remotely .. oh no, they're not within miles as cheap.  But, you know, they may get cheaper.  We'll find out.  But if they get cheaper .. as long as you're a net buyer of stocks, which we are at Berkshire,  we want them to be cheaper.  I mean, if they reduce the price of hamburgers at McDonald's today I feel terrific.  Now I don't go back and think, gee, I paid a little more yesterday.  I think I'm going to be buying them cheaper today.   Anything you're going to be buying in the future, you want to have get cheaper.

Becky:  You know, Larry Bossidy was a guest host of Squawk Box this morning.  He said, when he looks out at the market and looks at financials, he can't believe how much they've been beaten down and he says that could be the best-performing sector next year.  Is that a view you might share with him?

Buffett: Well, we own a few.  What you'll see in the financials, I think you'll see an enormous divergence in the performance.  I wouldn't want to be, I wouldn't think in terms of the group there, because some of them have done some very dumb things.   John Stumpf (CEO) of Wells Fargo had the best quote.  He said it's puzzling to him why bankers have come up with these new ways to lose money when the old ways were working so well.  (Laughs.)  But they have.  And in some places it's really been brutal.  Other places, it doesn't make much difference.  So I think if the group gets knocked down and you can pick out the better companies, the ones that really haven't gone crazy in recent years, particularly in the real-estate field, it would be a very good place to look.

Becky: We keep hearing all these big companies, like UBS yesterday, coming up with these write-downs, and the market's starting to look around and say, OK, is this finally it?  Is it the last shoe to drop?  Is there any way to know when it's the last shoe to drop?

Buffett:  No.  No.  When people start dropping shoes you really don't know whether they're a one-legged guy or a centipede.  (Laughs.)

Becky:  You said you own a couple of names, though.  What are those?

Buffett: Well, we've owned Wells Fargo a long time.  We've owned USB.  Some of them are black boxes.  Some of them are too hard to figure.  If they have enormous positions in mortgage-backed, or CDOs, or even in some forms of derivatives, they may be fine but I can't know that.   I like 'em fairly simple and somebody's characterized what's going on now as a flight to simplicity.  And there's a good reason for that.  You should only buy what you understand.  And I can only understand simple things, so, ergo, I look at simple businesses.

Becky:  All right, if you want to talk about something complicated, let's talk about that Super-SIV plan.  Has anybody explained this to you in a way that actually makes sense?  Do you think this is a good idea?

Buffett: Well, it's been explained to me.  And, I don't think it accomplishes a whole lot.  What it's designed to do is to get assets over in a place where people will buy the commercial paper against them.  And they'll buy that if the banks are backing it.  So,  right now you have a whole bunch of funds, particularly money market funds, that have financed these SIVs and they financed them in many cases because of the bank that was sponsoring them.  And the SIVs do not have the liquidity and they don't have the assets at market value to pay off the commercial paper.  So, there's a freeze in the financing of them.

The super-SIV would solve that by having the banks, in effect, back up the commercial paper, the super-SIV.  But it doesn't make the assets better.  I mean, one fundamental proposition is that even though we were taught when we were young that a princess could kiss a toad and it would turn into a prince,  it didn't really work out.  (Laughs.)

You can't turn a financial toad into a prince by kissing it, or by securitizing it.  Or by transferring its ownership to somebody else.   If there are problems with an instrument, there are problems with an instrument.  And some of the SIVs own things where the market value is down significantly and if sold presently, they couldn't pay off the commercial paper.

Becky:  So that's the problem?  It's not the market that's setting a price on it, we're setting an artificial price?

Buffett:  The market is the market.  Yeah, an artificial price is a price you don't like. (Laughs.)

Becky: Speaking of that, why don't we get into the (Bush) administration's plan for freezing some of the mortgages that are going to come through with some of the subprime things.  What's your take on that?

Buffett:  Well, it's a real problem to change contracts.  I'm not a Constitutional lawyer, but if I hold your mortgage, I'm not sure anyone can come along and change the terms of it.  Now, most of the mortgages are being serviced by servicers, who are, in effect, agents of somebody else who owns them who is the principal.   There's a lot of law about agency and principal.

The servicers generally have the right to do what they regard is in the best interests of the principal.  So if they think it's wise to adjust them in some way, or to have forebearance or to reduce the rate temporarily, they have that right.  Now what the government is doing is encouraging them to do it.  But I don't think the government can make them change contracts.

Becky:  No, and the government said they're not doing that ...

Buffett: They're not doing that.

Becky:  They're just recommending that.  What I don't understand is if this is something that's in the best interest of those people who are servicing it, why don't they come up with this idea themselves?

Buffett:  Well,  and they do.  And it may be that they'll be more aggressive about doing it.  But if I was servicing mortgages for somebody who's got a CDO over in Europe or something of the sort ... It does make sense to keep people in houses as long as they're making payments.  I mean, you do not want an empty house.  If I could reduce the rate temporarily from six  percent to four percent or something of the sort, and, ah, keep the people in the house and they could make the payments, and I knew they wanted to do it, and they were keeping up the house, as a servicer I would do that.   And I would feel I was acting in the best interest.

Becky:  But do you think the government's plan is a good one or a bad one?

Buffett:  I think it's, it's, it's a good course of action that should be taken anyway by servicers and this may stiffen their backbone a little bit by doing it.  It's not revolutionary and it shouldn't be used to tell them to let people stay in houses at any cost.  But all the government's really saying to the servicer is do what's in the best interest of your principal.  And they would presumably do that anyway.  They might do it a little more vigorously with this encouragement.

Becky:  Let's talk about why you're here today.  You're fund-raising for Senator Hillary Clinton.  What brings you to San Francisco?

Buffett: Well, I'm here on business on something else.  But I am also participating in a number of fund-raisers today for Senator Clinton.  I support her.  I did one in New York.  I told her before she ran, I told her I would support her if she ran for president.  I told Barack Obama the same thing.  And her schedule and mine worked in terms of getting here in San Francisco, so now we have four events today. 

Becky:  Four events, and it sounds like it's been heavily subscribed so far.  You're meeting with 50 people for breakfast right now?

Buffett: Yeah, 50 or so people.  Twelve-hundred or so, maybe more, later on.  We're going to raise, well as of a couple of days ago, we'd already raised over a million dollars, which would set a record here.  So, we're pleased.  Somebody's done a lot of work.  Not me.  (Laughs.)

Becky:  There are a lot of people who are still wondering, OK, you're still supporting Hillary Clinton, you're still supporting Barack Obama.  Is there a point where you make a decision and support one over the other?

Buffett:  No.  I told both before they ran, before they declared, that I would support them both if they ran for president, and then they both ran.  (Laughs.)  So I will suport both of them throughout the primaries and until a candidate is selected.  And I certainly hope it's one of the two of them.

Becky:  Do you have more fund-raisers planned for either of them at this point?

Buffett:  I told both of them I would participate in fund-raisers.  Their schedules are pretty much dominated by a state called Iowa, (laughs), and Nebraska is close to Iowa, but it has to be where we connect in the same place.  I did one for Barack in Omaha,  I did one for Hillary in New York and I'm doing one here in San Francisco.  I made the offer.

Becky:  When you start thinking about Iowa and what's been happening there, Barack Obama has made some strides in the polls, when you start looking at what's been happening in Iowa.  People are also talking about the Oprah factor and whether this has juiced his campaign.  What do you think about that?  Is his campaign seeing a surge?

Buffett: Is his campaign what?

Becky:  Is his campaign seeing a surge?

Buffett:  Well, all I know is the polls I read in the paper.  But I would say it certainly helps to have Oprah.  Oprah's a friend of mine, I mean, and she believes in the same kind of America I do.  So we have no quarrel politically.  And she's got to be a significant help.  She's working for him.  I've read the polls, so clearly they've changed, just like with Huckabee they've changed on the Republican side.  It's very unpredictable though.  The weather on January third, the weather can make a big difference.  It decided an election in Nebraska not so long ago.  Getting people to turn out for a caucus, I don't know whether there's a big football game that day, or anything of the sort, but ..

Becky:  There is a big football game that day.

Buffett: You know, if it goes into overtime, who knows what happens.  It's a very small vote.  I think it was 140-thousand in the Democratic caucuses last time and then you have this viability test where people can shift over if the candidate doesn't get 15 percent, so the second choice becomes important.  It's a real crap shoot.

Becky:  There are a lot of people who have said, OK, Hillary Clinton is leading on the Democratic side.  Rudy Giuliani is leading on the Republican side.  Do you think it's too soon to call any sure things at this point?

Buffett:  Sure.  It's way too soon.  A lot of funny things happen in politics, they have historically.   You know, at one time in 1992, Jerry Brown was leading .. Gary Hart was leading in 1988 and Mario Cuomo was second.  I mean, all kinds of strange things happen.  People do not firmly make up their mind this early.

Becky:  One of the reasons you're here, though, there's a lot of big VC (venture capital) money, a lot of big tech money that comes in, and those are some of the people who are going to be here supporting Hillary today.  Is that part of the reason of choosing San Francisco, or did it really have to do ...

Buffett: No, it had to do with logistics.  But there's going to be money in San Francisco, so we set out to get some of it.  (Laughs.)

Becky:  If you had to pick one or two of the most important issues for why you're supporting both these candidates, where would you go?

Buffett:  Well, I think they both understand what's made this country as prosperous as it is.  They are not going to kill the golden goose.  Every now and then you get a candidate you think does not understand that.  They know we've got a wonderful country and we've got a wonderful economic machine.  So, they will build on that, but they will look to an America, in my view, that makes more people share in that prosperity, without in any way dampening it.

They have the view that 300 million Americans in a country with $45,000 of GDP per person ought to have decent healthcare, ought to be progress made in education.  And I think they both share the view that we need to .. more respect around the world.  I think this country has really lost its moral leadership around the world.  And I think that both of them, either of them, will restore it.