Buffett Sees Stocks In "General Range of Fair Value": CNBC Interview Transcript (Part 2)
This morning on CNBC's Squawk Box, Warren Buffett publicly revealed for the first time that he has offered to reinsure $800 billion in municipal bondsnow covered by the troubled insurers MBIA, Ambac and FGIC.
Here is a video and transcript of the second part of this morning's live phone conversation, which also includes Buffett's comment that stocks are in the "general range of fair value" right now. This is a continuation of the transcript of this morning's conversation. The first part is posted separately.
Becky: How is the bond insurance business going so far, the one that you started up at the end of last year?
Buffett: Well, we've done a few things, and as I mentioned the other day, for example, we were paid two percent on a 50 million dollar deal, we were paid a two percent premium, that's a million dollars, and all we did on that was, we backed up the present bond insurer, which is rated triple-A, we backed them up in case they don't pay. So, we're getting a premium of two percent for something they charged originally less than one percent for, and they still have to pay and all we have to do is pay if they don't pay. So, it just shows you what the state of the market is now, and the fact, and it also shows you that the offer we made, I think, in terms of present market prices for insurance, is really on the low side.
Becky: In other news this morning, there's talk that six major mortgage lenders are doing something that they hope will prop up the housing market. They're talking about their plan to halt the foreclosure process, not only in subprime, but in some of the prime issues as well. One of the banks involved is Wells Fargo , which obviously you hold a stake in. What do you think about this plan?
Buffett: Well, I think anything Wells Fargo comes up with usually makes sense, so I, ah. It's always in the interest, it's almost always in the interest, of a mortgage lender to keep the borrower in the house as long as they've got a good faith borrower who's doing his best to pay what they can. It's a terrible thing. You've got an empty house, the value of it shrinks pretty fast. So they're probably acting in their own self-interest, which Adam Smith would be proud to know, they're also in the social interest as well.
Joe: Once again, your foresight, not just investments, but instead of just backing one or the other, Hillary or Barack Obama you said, 'I think either one of them would be great. I'd help either one of them raise money.' Can you comment on what seems to be a shifting tide at this point, Warren?
Buffett: Well, it's probably the most interesting election I've ever seen. And even though you're going to live a lot longer than I will, it's probably going to be the most interesting election you'll ever see.
Carl: I can't imagine you expected it to go this far?
Buffett: Well, you've got two outstanding candidates and you've got very enthusiastic people behind both and both have big money-raising possibilities and potential. It's going to go down to the wire, I think.
Joe: Just shifting gears again, you know, whenever we have you on, unless I get a really, really hard wrap that we gotta go, I'll just come up with questions.
Carl: Pull up a chair, Warren.
Joe: Yeah, grab a chair. But we have seen some smart people say we have dug ourselves such a hole, with all these, you know, current account, whatever deficit that you want to look at, that if we do go into a slow patch here that this could be either a real doozy, like maybe (former Treasury Secretary) Larry Summers or (billionaire investor George) Soros or someone like that said. Or there are other people who think that we've now learned how to manage business cycles and that the Fed can help. Do you think we'll ever have anything like we had back, when you, you know, back in the 30s, Mr. Buffett? Could it just get really nasty? Could that happen this time around? Do you have that feeling?
Buffett: It's a low probability, but, you never know what's going to happen, Joe. You know, the variables that go into any different economic scenario are always changing, they're relative weight changes. Human behavior doesn't change much, but, I've never made a dime predicting economic activity. We just try to buy businesses we understand at sensible prices. So, I know you don't want any advice from me on your golf game because I shoot around 110. And I really shoot about 110 in economic analysis, too, it's just not as easy to spot it.
Joe: Yeah, you've got a handicap. For awhile last week, it looked like you were calling for some sort of calamity with the "worthless" vs. "worth less" ..
Carl: Yeah, way to kill the dollar, Warren.
Joe: I figure if the dollar did go to zero, (laughter), that that would probably be some type of financial calamity. (Laughter). I mean, you've got to be careful with the media, Warren.
Buffett: (Laughing.) Yeah, I have to be very careful how I phrase things.
Carl: I don't know if there was a way around that one. That must have given you at least some sort of chuckle, right?
Buffett: (Laughing.) Well, it was entertaining. I still wanted to call and get it corrected pretty damn fast.
Joe: Yeah, it wouldn't be that funny with a run on banks and if all the stock markets crashed around .. yeah, that was a pretty ..
Becky: In all seriousness, though, Warren. On the dollar, when you start looking at it, would you be in a position where you'd be betting against the dollar again?
Buffett: Well, as we try to develop a little more in the way of foreign earnings at Berkshire, we'll move a little in that direction. We'll always be, you know, the majority of Berkshire's money, and my money, will always be tied to the U.S. dollar. But I do not think the future of the U.S. dollar is great as long as we keep following the policies that are almost certain to weaken it over time.
Joe: How has the, in this slowdown, Warren, the NetJets business? Have you seen any slowdown at all in that area? I figure that they're so many rich people that you haven't at all, I guess.
Buffett: The super-rich have not felt this. It's interesting, because I do get those figures on a very frequent basis. I'm curious about it. In December, it was a record. Marquis sells these cards that entitle people to use NetJets, and on the Friday before Christmas I think they sold 61 in one day alone. And the starting price for those is over one-hundred thousand, and we set a record in December. January was strong. So far, you haven't seen anything among the super-wealthy.
Now we see it at our jewelry stores, we see it at our furniture stores, that the middle-class, and the upper-middle-class, you know, they're struggling. And that business is slow but the super-rich seem to be flying along.
Bogle: As always, Warren, as always.
Carl: Warren, a question from some of our friends in the bond pits in Chicago. They want to ask: Given ratings right now, is it possible that some of the insurers could do a swap where you issue new paper with new ratings on the muni front? Is that a possibility for them?
Buffett: Well, I don't, ah. In effect, they would be getting new paper if they took up our offer. We would reinsure these three that we made the offer to and at that point it would have a Berkshire Hathaway triple-A on that paper. And people are paying us two percent just to get the guarantee behind them, and obviously in the market they feel it makes the value of that bond even more than that after paying the premium. So, I think that, it's the efficient way to do it. I mean, it can solve it in one stroke of a pen.
We're doing it one-by-one now, and we're getting paid more for doing it on a one-by-one basis, but this would just eliminate one major cloud from the market.
Becky: Still, you're not doing this out of the kindness of your heart, right, Warren?
Buffett: No, no, no. This is, when I go to Saint Peter I will not present this as some act that should entitle me to get in. No, we're doing this to, we're doing this to make money. And, you know, if you put up five billion, we think we ought to make some money. But this, I did not dream this up in one of my pro bono moments.
Becky: Warren, if you had to put money on it, would you think that any of these three major bond insurers would actually take you up on it? I realize you have one that's turned you down so far.
Buffett: Yeah, it doesn't look like it, Becky, but in the end what they can do is they could take us up on it and then have a month to come up with a better deal, and it would cost them a fairly modest break-up fee and they would know that at the end of the month they'd have a solution. And maybe they'd have a lot better solution.
Carl: I like asking you Warren, where you think stocks are priced right now, just to listen to the new inventive ways you come up to dance around the question, but we'd be remiss if we didn't ask. Where, or how, do you think stocks are priced right now?
Buffett: I, this is not a prediction of where they go, but I would say they're sort of, and again this is not a big field of expertise for me, but the things I look at seem to me like they're priced in the general range of fair value. They're not cheap, they're not over-priced. But you've got to look at them one-by-one. But as I look at the things, you know, dozens of stocks that I look at, they seem like they're about right considering all the variables.
I do not put into my pricing a lot of thought about what the economy will do in the next year. I really think about what the businesses are likely to do over the next ten years.
Bogle: Warren, I know you've said many times that you look at stocks through the magnifying glass of corporate profits as a percent of GDP.
Bogle: And they're at an all-time high, or were at an all-time high ..
Buffett: Yeah, you're right. They've been at an all-time high, Jack.
Bogle: And the norm is about six. Do you look for a little regression to the mean there?
Buffett: I would think there almost has to be over time
Bogle: That's what I would think.
Buffett: They've been, corporate profits have been through the roof, and partly helped by low effective corporate tax rates for many companies. And, if I had to bet, I would bet real money that over the next ten years they'll average less than they've been averaging currently as a percentage of GDP.
Bogle: Yeah, I agree with you on that.
Joe: You probably, here we go again, you probably even saw Countrywide , I would imagine, Mr. Buffett and then Bank of America is going to end up there. Do you think that was a good deal for Bank of America?
Buffett: Well, I think they won't know the answer to that for three of four years. I mean, they know they're buying into lots of problems, but they're buying at a price that reflects a lot of problems. Now, whether the problems turn out to be bigger than that price discount they built into the deal, you know, who knows? They did have a chance to take over the largest servicer, and perhaps originator, of mortgages in the country and ..
Joe: You had the same chance.
Buffett: Well, some deals are too complicated for me. I like simple things. The nice thing, Joe, about the investment business is there's no 'degree of difficulty' factor.
Joe: That's right.
Buffett: If you're in Olympic diving, you have to do some very complicated dive in order to get points. But in the investment business, you get paid as much for stepping over a one-foot bar as you do for jumping over a seven-foot bar.
Joe: You think that there are any signs that commodities are in a bubble right now, or does this all make sense?
Buffett: Well, commodities are not my game. But to a small extent, that reflects what's been happening to the dollar. But, there's also been a huge commodities boom measured in terms of any currency.
Joe: We always ask for our Squawk jet and you always send See's Candies. You know, under twenty-five dollar's worth. Carl is happy with See's. I just figured out a compromise when you mentioned one of those cards.
Buffett: You're thinking of the Marquis card, no doubt?
Joe: I'm thinking about the Marquis card. That's not a jet and it's not See's Candies.
Carl: more and more of the toffee. I'll take more of the toffee. (Laughter.)
Buffett: Joe, I would suggest you get a taste for candy. (Laughter.)
Becky: Hey, Warren.
Bogle: I'll take the jet, Warren. (Laughter.)
Becky: What do you think about Bank of America going into the Dow Jones Industrial Average? That makes the fifth Dow component that's a financial. We're still talking about an industrial average, right?
Buffett: Yeah, well, (laughs), I guess they've broadened the definition of an industrial. You know, they used to have, for many years, the anomaly in the Dow Jones average was AT&T. It was there for a long time, and of course, it was a utility, so they show a certain amount of flexibility in terms of their lexicon over there at Dow Jones.
Becky: Well, Warren, I want to thank you very much for calling in today and giving us the details on what you've proposed to do with the bond insurers. I know you have a plane to catch, but thank you again for calling in.
Joe: Are you flying commercial today, Warren?
Buffett: (Laughing.) When I fly commercial, you'll know I'm broke. (Laughter.)
Joe: That's what I said, your last in-flight movie, I believe, was Casablanca when it was actually running.
Buffett: It was actually the previews to Casablanca.
Joe: The previews to Casablanca.
Carl: That's tough. When they edit the Chaplin movies for planes.
Buffett: No, I go back to the silent movies in the planes.
Becky: Hey, Warren, thank you very much today and have a safe flight.
Buffett: OK, thanks.
Bogle: Take care, Warren.
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