The 'Sage of Omaha' Is Less than Sanguine

I've often noted that the financial industry is rife with pathological optimists and clueless wishful thinkers. However, there are a few exceptions. The realists include individuals like Albert Edwards and James Montier, the highly-rated co-heads of strategy at France's Societe Generale, and Merrill Lynch's North American economist, David Rosenberg.

Another individual who is not usually found in the bear camp, but who is nevertheless willing to call it like he sees it when he sees trouble on the horizon, is the billionaire chairman of Berkshire Hathaway. In "Buffett Sees 'Long, Deep' U.S. Recession," Reuters reports that the "sage of Omaha" has a less-than-sanguine outlook nowadays.

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investor Warren Buffett said in an interview published in German magazine Der Spiegel on Saturday.

He said the United States was "already in recession" and added: "Perhaps not in the sense that economists would define it" with two consecutive quarters of negative growth.

"But the people are already feeling the effects," said Buffett, the world's richest man. "It will be deeper and last longer than many think."

But he said that won't stop him from investing in selected companies and said he remained interested in well-managed German family-owned companies.

"If the world were falling apart I'd still invest in companies," he said.

Buffett also renewed his criticism of derivatives trading.

"It's not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health."

Buffett complained about the lack of effective controls.

"That's the problem," he said. "You can't steer it, you can't regulate it anymore. You can't get the genie back in the bottle."

Comments

[A. Zarkov]

"Buffett also renewed his criticism of derivatives trading."

According to the WSJ:

"Billionaire insurance salesman Warren Buffett has been selling more derivatives recently.

This year, Berkshire Hathaway Inc., the Omaha, Neb., holding company headed by Mr. Buffett, has collected premiums of about $2.5 billion from selling insurance on stock indexes and bonds in the form of derivative contracts,...

...Mr. Buffett has long used derivatives as part of Berkshire's insurance business and has used them as investments opportunistically,..."

http://online.wsj.com/article/SB119422251636481981-email.html?apl=y&r=307908

Is there a disconnect here?

[Mista B]

No disconnect.

Buffett has sold some very long-term (15 years) put options on market indices. These are European style, meaning he won't owe anything until the options expire, and then only if the indices are below a certain level. These put options are very simple contracts. The derivatives to which he's referring are, on the other hand, impenetrable. You'd need to read and comprehend 75,000 pages of various prospectuses just to understand one. There's no issue when the credit markets are hunky dory. These derivatives, however, have never been tested in an atmosphere like we're seeing today. As a prior article here went into, it was chaos behind the scenes during the Bear Stearns fiasco. There's no such chaos in the options markets. Buffett selling some puts is a non-event.