TRANSCRIPT/VIDEO PART TWO: Three Hours With Warren Buffett - Live From Omaha
By: Alex Crippen | Executive Producer
QUICK: All right. Let's get to some...
BUFFETT: Where's the popcorn?
QUICK: Oh, there--they didn't provide popcorn quite this early...
BUFFETT: All right.
QUICK: ...but we do have some questions that are coming up. Let's get to the first question for Mr. Buffett.
Unidentified Man #1: Do you think there's a characteristic about American democracy that leads to American debt?
QUICK: A characteristic about American democracy that leads to American debt. What do you think?
BUFFETT: Well, there's nothing inappropriate about having debt in America. I mean, Berkshire has debt, and it's helped us grow over time. And it's when debt gets out of control that you worry. But the American democracy, it's always fun to spend a little more than you take in, and that applies to individuals, it applies to governments. And in a $14 trillion economy, having debt that's 60-odd percent of GDP is not inappropriate. It wasn't inappropriate when we had 120 percent of GDP in debt after World War II, because we had to fight a war.
QUICK: Although you can't expect to maintain deficits like that endlessly.
BUFFETT: Yeah, you can expect to maintain a deficit that's a given percentage of the GDP. I mean, Berkshire can expect to have debt forever, and the larger we get in terms of our equity and earning power, the more debt we can sustain. And I don't think our shareholders would want us to operate--take on some rule where we're going to operate debt-free in the future. So it's--what you worry about is when the debt starts spiraling out of control, when it goes up year after year after year as a percentage of GDP, because eventually when that occurs people--if you try to borrow money around the world in your own currency, the world will say no. That's what happened in South America in the past, it happened in the--in the Asian arena. We are able to borrow money in dollars. The world trusts the dollar. If we tried to run our debt up to 3- or 400 percent of GDP, nobody would want debt denominated in dollars.
QUICK: OK. Let's take another question. This one comes from Irvine, California.
Unidentified Man #2: Hey, Mr. Buffett, I would like to know what is going to happen with Fannie Mae. Are they going under?
QUICK: That was, again, what would be the best investment to hedge against the upcoming debt crisis?
BUFFETT: Yeah. Well, I would say I don't think there's going to be an upcoming debt crisis, but if you believe that fiscal activities that the government will get out of control and that we will get on a situation where the debt skyrockets, you will have, obviously, you'll have inflation--significant inflation. No government likes to pay back its debt in dollars that are equivalent to the kind they took in. The best thing you're going to have is develop your own talent. I mean, if you're the best doctor in town, if you're the best teacher in town, if you're, you know, the best salesman in town, you'll do well no matter what the currency does.
QUICK: Mm-hmm.
BUFFETT: I mean, you will get your share. So investing in yourself is always the best thing. Now, second best thing is to own products or stocks that have products that don't require much capital investment, because you don't want to be--have a lot of required capital investment during inflation; where they have very little capital investment but they are sort of a royalty on whatever the current price level is in the country. I mean, if you take--I don't know what product you might buy regularly, but what--whatever you use for your hair or...
QUICK: (Unintelligible)
BUFFETT: You're not going to change that if the price level doubles.
QUICK: Right.
BUFFETT: And if they don't have to build new plants or anything, they just ride along that curve.
QUICK: OK. And very quickly, that Irvine, California, question, I think we heard the wrong one. The Irvine question, another one he was just asking about was what's going to happen with Fannie Mae? Are they going under?
BUFFETT: Well, in a sense they've gone under in that--in that they only are existing because the federal government has said that they're going to back up their obligations, so that...
QUICK: Right.
BUFFETT: ...from a standpoint of an independent entity, it--it's--the game is over on that, pretty much. And that does not mean the Fannie debt or the guarantee on Fannie mortgages is bad. Fannie Mae's an important institution in the--in the United States. But they priced risk wrong.
QUICK: Mm-hmm.
BUFFETT: They did some things in accounting that were bad, they tried to obtain goals that couldn't be achieved, and in the--and they leveraged up to an extent that was kind of crazy and certainly was crazy to do it with the assets that they were using the leverage for. So essentially the equity got wiped out.
QUICK: OK. We're going to take a quick break right now, but folks, when we come back we're going to talk about Warren and Bill's excellent adventure. We'll get the inside story of your summer expedition with Bill Gates. You just went this week to look at the tar sands.
BUFFETT: True.
QUICK: All right. We're going to talk about all of that when we come up, and we'll be checking in with questions from more viewers across the country, too.
Unidentified Man #3: I was very curious, in your recent 10-Q, that you had not purchased any bank stocks, very surprised that you had not jumped on that in July. I was wondering how low they have to go before you're interested.
BUFFETT'S TRIP TO THE CANADIAN OIL SANDS
Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. Now, once again, here's Warren Buffett and Becky Quick.
QUICK: Welcome back, everybody, to this special edition of SQUAWK BOX. We've been talking all morning long with Warren Buffett of Omaha, Nebraska, since we're live in Omaha today. And, Warren, we've covered a range of topics, but there has been an awful lot of people who are interested in the trip you made this week. On Monday you headed up with Bill Gates and you got to take a look at the tar sands. What happened?
BUFFETT: Well, what happened was Bill and I talked some months ago about just how interesting the whole thing was from a geology standpoint and from the standpoint that that represents one of the few big upcoming sources of more oil production in the world, or very few. And we both thought we'd understand a little bit better if we went up and looked at it than simply by reading about it. So on Monday six of us, Bill and a few other fellows--the Kiewit company arranged it. They're--they've done a lot of construction up there. And we went up to northern Alberta and we saw a very big mining-type project. There are two ways that they recover oil from the tar sands. And then we went to this in situ project also, and we had some perfect people explain a lot about how it worked both from a economic standpoint and from a physical standpoint.
QUICK: Uh-huh. And was this something that you came up with, that Bill came up with, your friend, Walter Scott, from the Kiewit company? Who came up with the idea?
BUFFETT: Well, Walter Scott arranged it for us.
QUICK: Right.
BUFFETT: Walter's a whole lot smarter than I am about what goes on in mining and all of--anything to do with the real world. I'm good with numbers. And so he arranged the trip for us. But it was something that Bill and I cooked up by--a couple of months ago when we were talking about the tar sands. We said why don't we go up and take a look? And so we found a date when six of us could do it. Walter arranged the trip. We had some wonderful people up there in Alberta at both projects that explained how the things really work, the costs involved. And they just couldn't have been more helpful.
QUICK: OK. So having seen that, there's already been a lot of people who've been speculating that you must be interested in investing in this arena. Are you?
BUFFETT: No, no. I go to the movies, but I don't buy movie companies. I mean, I--I'm always interested in understanding the math of things and understanding as much as I can about all aspects of business. And what I learn today may be useful to me two years from now. I mean, if I understand the tar stands today and oil prices change or whatever may happen, I'm--I've got that filed away and I can--I can use it at some later date. And that's really the wonderful thing about investments is your knowledge is cumulative. So if you learn about coal or you learn about retailing or something, 40 years you--it's useful at some point.
QUICK: Wait, does that make you think that an investment in a tar sands company, somebody who's making--taking advantage of that would not be worth it at $120 a barrel for oil?
BUFFETT: Well, the biggest variable in whether it's a good investment is the price of oil. Now, it's important to know how much they can get out and what their costs are going to be and what the capital costs--all of that is important and that fits into it. But you still have to figure out what your own feeling is about what oil's going to be selling for three years from now or five years from now. Because you could be the world's greatest mining engineer, but if you were wrong about the price of oil in a big way it would negate all that knowledge. So it--I can tell you that if 100--if you had $120 oil from now till, you know, 50 years from now, that the tar sands would be--would work out very well. But I don't know the answer to that. And I may form an opinion at some point, and I've got it--I'm prepared to form that opinion now.
QUICK: But you are not actively looking right now to invest in any of these companies?
BUFFETT: Do I have a buy order this morning? The answer's no.
QUICK: OK. Warren, we have a lot more to get to with you this morning. When we return, we're going to be speaking more with Warren Buffett. Again, this is a big day. We've still got two hours left and we've still got two big stories coming up. Again, I'm here live with Warren Buffett in Omaha. We're also going to be covering everything that's happening with the Olympics. Carl is standing by live in Beijing. This is day 13 of the Olympics, coming to an end. We'll have more SQUAWK in two minutes.
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