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CNBC Buffett Transcript Part 1: Most Berkshire Businesses 'Inching Along'

Wednesday, 2 Mar 2011 | 8:22 AM ET

Warren Buffett appeared live on CNBC's Squawk Box this morning, March 2, 2011.

This is Part One of a transcript of his comments.

Announcer: This is a special presentation of SQUAWK BOX, a three-hour conversation with the "Oracle of Omaha," Warren Buffett, the wit and wisdom of an investing legend.

BECKY QUICK: Good morning, everybody. Welcome to SQUAWK BOX here in CNBC. I'm Becky Quick in Omaha. Joe Kernen and Carl Quintanilla are back at headquarters at CNBC.

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Warren Buffett, Berkshire Hathaway CEO, says he doesn't worry about where oil prices are going.

And we are live this morning in Omaha at the Durham Museum in front of a very special store. This is the Ernest Buffett store. Of course, Ernest Buffett is the grandfather of a very famous son of Omaha, Warren Buffett. As always, we have a lot to talk about with him.

Warren, it's great to see you this morning.

WARREN BUFFETT (Berkshire Hathaway Chairman and CEO): It's good to have you here.

BECKY: Thanks for coming down and being in front of the store with us.

BUFFETT: Yeah, well, it makes me feel at home.

BECKY: Yeah. This is, again, a mock-up of your grandfather's store where you worked, yourself.

BUFFETT: Yeah, actually this is my great-grandfather's...

BECKY: Your great-grandfather.

BUFFETT: Yeah. Because my grandfather didn't work at this store. But it was originally Sidney Buffett & Sons. And he had two sons that worked with him, Ernest and Frank, and then they fell in love with the same woman who worked in the store. She married one of them, and the other one didn't speak to the guy for 20 years.

BECKY: Which is why it's only the Ernest Buffett store.

BUFFETT: Yeah, that's right. That's right.

BECKY: Well, want to thank you very much for being here and for agreeing to take questions from our viewers today.

BUFFETT: That'll be fun.

BECKY: It will be fun. We have a lot to get to this morning, but before we do, we'd like to get to a few of those hundreds of e-mails. We're going to get to those in just a little bit. First, though, Carl's going to bring us up to speed on what's been happening. He's got the morning's top headlines.

And, Carl, good morning.

CARL QUINTANILLA, co-host:

All right. Good morning to you, Beck. It's going to be great.

***

QUINTANILLA: But we've got a lot going on this morning, Becky, as you know, and we'll send it back to you in Omaha. Gorgeous live shot this morning, by the way.

BECKY: Oh, thank you very much, Carl. We are again here spending the morning with Warren Buffett and, as we mentioned, we're at the Durham Museum here in Omaha. We're in front of a mock-up of the Ernest Buffett grocery store, which is a store Mr. Buffett knows well. He worked there himself as a youngster.

And, Warren, thank you again for being with us this morning.

BUFFETT: Oh, thank you. That was the last time I did any real work, actually.

BECKY: Since then it's gotten a little easier?

BUFFETT: It's much easier. I—the only thing I learned from that store was I didn't like hard work.

BECKY: Well, that's a good way to grow up and a good way to figure things out.

BUFFETT: Yeah.

BECKY: You know, I don't know if you just heard Carl and Joe talking a little bit about the markets and the situation yesterday. Oil prices seemed to have been dictating where the market's been headed for the last week and a half or so. Do you worry about oil prices? Do you worry about what's happening in the Middle East?

BUFFETT: Well, you may worry as a citizen about what's happening, but in terms of our investments, it—no. It doesn't have anything to do with where or Coca-Cola are going to be in five years from now. But I am just no good on day-to-day or week-to-week, month-to-month stock prices and, fortunately, I don't have to be.

BECKY: Yeah. Joe just mentioned that we spoke with someone yesterday who said the oil market's doing exactly what it should be, which is overreacting. He used to run Saudi Aramco, and it's an interesting position. Even though you look at these prices, we've heard from Ben Bernanke and others that this is not something we need to be concerned about yet. Is that where you come in on this?

BUFFETT: Well, I just don't know the answer on that. I mean, that would depend on events in the future. Six months or eight months ago, we weren't worried about cotton prices at Fruit of the Loom and, you know, they've gone from 80, 90 cents to $1.90. So it's—you just don't know about commodities. If they get short and people need them, I mean, we have to make T-shirts and briefs and that sort of thing, and if there isn't enough cotton around in a given month, we buy it regardless of price. And oil is the same way. The demand is pretty inelastic in the short run, so if you get any real interruptions in big supplies of oil—and I know there's excess capacity around—but a big enough interruption could cause a big change in price.

BECKY: We have not seen a significant interruption yet, though.

BUFFETT: Right.

BECKY: The Libyan oil market may be — it's 2 percent of the global supply and maybe about half of that has been cut at one point or another.

BUFFETT: Yeah.

BECKY: And yet you see oil prices running back up above $100. That's where they were trading yesterday in the extended hours.

BUFFETT: Yeah.

BECKY: Is that something that you think is tied to speculation? Is that something that is or could be prevented? Or is this a real supply situation?

BUFFETT: Well, it isn't a real supply situation yet, but markets anticipate.

BECKY: Yeah.

Warren Buffett Speaks
Warren Buffett Speaks

BUFFETT: And if—people are not worried about Libya getting cut off, what they're worried about is that the unrest spreads and that some three or four million barrels a day would get cut off. And that's a rational thing to worry about. What the probability is of it happening, who knows? But it isn't zero, and it looks higher now than it would've looked two months ago, so that starts to get reflected in prices. Markets anticipate.

BECKY: Your annual shareholders letter that you just came out with on Saturday painted a much more optimistic picture of America than many people had been thinking to this point. Why is that? And why are you so positive about things?

BUFFETT: Well, I've been optimistic on America right along, as you know. I mean, I was optimistic when I knew things were going to go to hell. But things do—America gets off the track from time to time, and it was particularly so in the fall of 2008. But you can't stop this country. I mean, we have gone through, I don't know, 15 recessions, you know, world wars, civil war, you name it. And there is a resiliency to the American system. It does work. And it sputters from time to time. It'll sputter from time to time in the future, but you don't want to get too concerned about that. It's kind of like having a bad crop in farming. If you've got some good land here in the Midwest, you're going to have a bad crop occasionally. But you know you're going to have mostly good crops and we have great soil for this country, metaphorically. And it works over time.

BECKY: So what are you seeing in your businesses right now? You said that we're back on track, but are we chugging along? Are we inching a long? How are things coming?

BUFFETT: It's probably closer to inching in most businesses. And in residential construction, it's not inching. It's not going at all. But so you do have this uneven situation. We have a few businesses that are—that are really kind of booming, but—and we have a great many businesses that are moving forward, and then we have some—a few that are stuck. And—but I think that's true of the economy. So—but what we've seen now for almost two years is we've seen it getting better. Rather consistently, but not in a dramatic—at a dramatic pace. And what has been interesting to me is that the sentiment has gone up and down quite a bit during a period when you really haven't seen all that much change in the underlying trend.

BECKY: And in terms of your businesses, you say you have some that are booming. Which ones are those?

BUFFETT: Well, I mentioned the annual report. We've got an electronic component distributorship...

BECKY: Mm-hmm.

BUFFETT: ...in a company called TTI, and they're booming in Asia, they're booming in Europe, and they're booming in this country. And they sell these little things that cost, you know, a couple of pennies. It's like selling jelly beans or something of the sort. But they go to all kinds of customers. And their business has never been this strong. The railroad business has picked up. It's about 60 percent of the way back from the bottom. If you take the top, and car loadings take it down to the bottom, we've got about 60 percent of the way back. So there's a—there's a considerable ways to go there, but it's a different business than it was two years ago. And it gets better by the quarter, as we go along. We see at our machine tools, small little tools that go in big tools, a company called Iscar.

BUFFETT: I just got the January figures and January was a record month. And now not by a huge margin, but it just keeps getting better month by month. So—and nobody's buying those to put them in their homes, you know, or for speculation.

For his live appearance on CNBC's Squawk Box, Warren Buffett sat in front of an Omaha museum's mock-up of his great-grandfather's grocery store.
CNBC/Dave Grogan
For his live appearance on CNBC's Squawk Box, Warren Buffett sat in front of an Omaha museum's mock-up of his great-grandfather's grocery store.

BECKY: Right.

BUFFETT: They're buying them because they're using them.

BECKY: When do we see that actually play out in the jobs market? That's been the huge concern. We've got another jobs report that's coming up on Friday.

BUFFETT: Yeah. Our business at Berkshire was quite a bit better in 2010 than 2009, but we only added 3,000 jobs, you know, from 260,000 roughly, on a base. So we added 1 percent to jobs net and yet our business really improved quite a bit more than that.

BECKY: Mm-hmm.

BUFFETT: And there were real gains in productivity achieved on the downside. People, at least when they really had to tighten their belts, they found out they could do it. And I think that period is largely over. I think the gains in business will be much more reflected by gains in employment going from this point forward than they have in the first year and a half or two years of this recovery.

BECKY: Does that mean good news by the end of this year? Or does that mean good news by next year because depending on whose forecast you're watching, the employment number could go down significantly.

BUFFETT: Yeah, yeah.

BECKY: This year, or it might take two years.

BUFFETT: I'm not a—I really don't know the answer on that, but if you ask me just to guess...

BECKY: Mm-hmm.

BUFFETT: ...I would guess that that by the—by close to the election of 2012 that unemployment would be probably in the low 7s.

BECKY: OK.

BUFFETT: And then how good that'll look to people, I don't know at the time. But that would be my guess from what I see in business.

BECKY: You mentioned that the housing businesses that you have are not inching along, they're stuck. You also said, though, in your annual letter that you think housing is at a position where a year from now things might look considerably better. Tim Geithner was on the Hill yesterday. He said there's still a lot of pain to work out in housing. And you had 9400 employees that you had laid off in those businesses that cater to housing.

BUFFETT: Right.

BECKY: So when do you think it—you can actually start hiring back there?

BUFFETT: Well, we'll hire when housing starts to pick up.

BECKY: Right.

BUFFETT: And they've been now in this 550,000 a year or 600,000 range for quite a while. And they needed to be. The demand for housing comes from household formations. I mean, and household formations are running considerably higher than housing starts. So they are—the excess housing supply is being sopped up. Not at an incredible rate, but at a significant rate. And that's a counterbalance to the fact that we were building two million housing units, you know, and people were—they weren't creating two million families a year at that time. So we were—we were just building too darn many houses. And they don't go away. So the only way to solve that is to underproduce compared to household formations. And we've been doing that for a couple of years, and that's why my guess is that, in about a year, that we will have sopped up the excess supply. Now, that doesn't mean there's not all kinds of people who want to sell their house for what they paid for it five years ago.

BECKY: Mm-hmm. Right, right.

BUFFETT: But that's a whole different question. I think it's—I think it's—I know housing will pick up at some point, and it seems logical to me that it should pick up on about a year based on the—on the number of units that are getting sopped up. And it was—it's a good thing. I mean, we had that one incentive there for a while to try to move housing.

BECKY: A tax break for first-time buyers.

BUFFETT: The real thing to do is clean out the excess inventory, and the only way you clean out excess inventory, you either—you either blow up the houses or you produce fewer than households are getting formed.

BECKY: Mm-hmm.

BUFFETT: And any artificial acceleration of demand, it just means disappointment later on.

BECKY: So you didn't think the government should've made those moves?

BUFFETT: I don't think—yeah, I don't think that trying to move the fourth quarter's demand into the first quarter is a—probably not a good idea. It—we had to clean out the excess.

BECKY: You know, we're just getting to the end of a lot of government programs like that. Not only what we saw with Cash for Clunkers, with the first time hire—buyers tax credit or tax deduction that would go in. You also are getting to the point where QE2 is nearing a point where it's going to end. Now, Ben Bernanke was on Capitol Hill yesterday, too, and he did not give any indication that they'd be ending QE2 early, but it only goes through June. So what happens to the markets as, you said they're very forward looking, as they come to the recognition that the Treasury's not going to be there, or the Fed's not going to be there to prop up the Treasury market anymore.

BUFFETT: Well, I do not like—I do not like short-term bonds, and I do not like long-term bonds. And if you push me, I'm sure that I don't like intermediate-term bonds either. I just think it's a terrible mistake to buy into fixed dollar investments at these kind of rates, and I've thought so, you know, for several years now. When people ran to cash because they were afraid of everything, they were really going to the worst investment, you know, that's possible. I don't know what'll happen with Treasury markets, but we have had—I don't think people necessarily realize we've had monetary policy with its foot to the floor for a couple of years.

BECKY: Mm-hmm.

BUFFETT: And we needed that to get out of where we were. How long we need it for is another question. But the idea of overdosing the patient two years ago was a terrific idea. The patient needed every bit of morphine or whatever you put in them that they could take. We came on with fiscal policy very strong, and what people don't realize about fiscal policy, we talked about a stimulus bill a couple of years ago.

QUICK: Mm-hmm.

BUFFETT: But a stimulus bill isn't a stimulus bill because you stick the word stimulus on it. I mean, you can call any bill that spends money in Washington a stimulus bill. Stimulus is spending more money by the government than it's taking in. We are going to do that to the tune of 10 percent of GDP this year. We have massive stimulus going on in the United States. Stimulus like you haven't seen since World War II. We just don't call it a stimulus bill. But stimulus is the federal government spending way more money than it takes in, and you can call it a stimulus bill, you can— you can— you can, you know, you can call it the green flowers bill, but whatever causes the government to spend a lot more money than it's taking in is stimulus. And when you get to 10 percent of GDP you've got massive stimulus. So you've got massive monetary activity, you've got massive stimulus activity. And then what I think is the most important factor in coming out of the recession is sort of the natural regenerative capacity of capitalism. I think that's— now I think the other two can be important, and I think they're psychologically important because people expect the government to do that, and they don't— they wouldn't have confidence if the government wasn't doing it. But I think the main thing that makes the economy come back is 300 and some million people trying to figure out how to live better tomorrow than they're living today.

QUICK: That sounds like an argument for an end to this. You said— is there too much? You said we needed it then. Have we needed QE2 in some of the latest doses?

BUFFETT: Yeah. I don't— I don't think we need as much either monetary or fiscal stimulus as is going on. I think— I think we needed— the American public, the whole world needed to see two years ago that the federal government when the— when the world was going to try and deleverage and people were panicked over every kind of financial instrument, they needed to see the federal government there big time, and the government really did its job there in the fall of 2008. They threw in— they threw in everything and that was hugely important in getting across to the American people that they are— was not going to stand idly by while the whole machine came to a stop.

QUICK: Mm-hmm.

BUFFETT: But in terms of the recovery going on now, that recovery is going on because we've got 70-something managers at, you know, Berkshire trying to figure out how to do more business tomorrow than yesterday. And, you know, just look at what Apple does, or you name the company, or Amazon. They are thinking all the time of how to— how to get their customers to do more things with them.

QUICK: Let me ask you real quickly— Joe has a question, too— but I just want to pin you down on this and make sure I'm not making assumptions or putting words in your mouth. You think QE2 should end now?

BUFFETT: If I were— yeah, I have enormous respect for Ben Bernanke. He knows way— you know, he knows more about the Fed than I do by a factor of 100 to one. But in the end, I don't— I don't think we need more of that now.

TRANSCRIPT PART 2: THE 'ZEBRA' THAT GOT AWAY

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