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Buffet's Letter Warns Of Economy "In Shambles"

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Buffet's Letter Warns Of Economy "In Shambles"


Buffet's Letter Warns Of Economy "In Shambles"

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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This is WEEKEND EDITION from NPR News. I'm Scott Simon. Don't worry, Liane Hansen will be back next week. I'm just sitting in for her. She's on vacation this week.

And it is, of course, the first day of March. Could the U.S. economy this month possibly be worse than last month? February ended with stocks at a 12-year low, and the Commerce Department reported that the country's gross domestic product shrank a dizzying 6.2 percent at the last quarter of 2008. That's much more than anyone had predicted. Even - or perhaps, especially - Warren Buffett is pessimistic.

Yesterday, in his annual letter to shareholders of his company, Berkshire Hathaway, Mr. Buffett said he expects the economy to be, quote, in shambles for the rest of the year. Nigel Gault joins us. He's the chief U.S. economist for Global Insight, an economic research and forecasting firm. Mr. Gault, thanks for being with us.

Mr. NIGEL GAULT (Chief U.S. Economist, Global Insight): Thanks. Good morning.

SIMON: What do you make of that assessment by Mr. Buffett?

Mr. GAULT: Well, he's not mincing words, but I think he is describing what we are seeing right now. This is a freefall, at the moment, in activity such as we haven't seen since the Depression. And I think, although the fourth quarter was bad, it looks like the first quarter in the economy is going to be just as bad.

And we have a very nasty, vicious cycle right now operating between the financial sector and the real part of the economy - that as the credit crisis squeezes the real economy, house prices go lower, stock prices go lower.

In turn, that worsens the losses in the financial sector, which, in turn, worsens the credit crisis and feeds back to the real economy. So, it's a very nasty, vicious cycle that we are seeing.

SIMON: Mr. Buffett also warns that there could be - in fact, he expects what he calls an onslaught of inflation because the government is pouring so much money into the economy.

Mr. GAULT: That's a risk for the future. It's not something that's an immediate concern. The immediate concern is actually preventing deflation. But for the longer term, once the economy does start to improve, if all the stimulus that's being pumped in by the Federal Reserve and also by the government through this fiscal stimulus package - if that doesn't get withdrawn quickly enough, then you do risk having a surge of the inflation at the point when the economy starts to come back.

SIMON: I don't want to lose sight of the second half of Mr. Buffett's letter, where he actually sounds a little eager. He says it's a good time to buy quality products. I believe he says quality stocks and quality socks, the kinds of stuff you, you know, you put on your feet. Is this also a good time for people that have the means to be able to - well, let me get you to finish that sentence.

Mr. GAULT: Well, it's a question, I think, of being selective. Because what you're likely to find in a period like this, where there's almost financial panic, is that all stocks will get marked down. Prices will get hit very, very hard without too much discrimination of which are the better long-term bits and which are not. And Warren Buffett historically has proved himself very good at picking out long-term value.

So, for an investor who can assess which are still good bets for the long run but are temporarily undervalued, there clearly are bargains out there, and he's looking for them.

SIMON: Mr. Gault, in the 30 seconds we have left, what sign will you be looking for six months from now that the stimulus of the economy is working or not?

Mr. GAULT: I think the main thing I'd be looking for would be some slowdown in the place of deterioration in the labor market, and the labor market is going to get worse for a long time. But we are losing 600,000 or so jobs per month. Once that starts to visibly slow, once the rate of decline there starts to slow, that might indicate that we are starting to move on the road to recovery in terms of any growth.

SIMON: Nigel Gault, chief U.S. economist for Global Insight. Thanks so much for being with us.

Mr. GAULT: Thank you.

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