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CNBC Buffett Transcript Part 6: China and America's Diminishing Dominance

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

This is Part Six of a transcript of his comments.

Click here for Part Five: Cars and Bricks

BECKY: Well, let's talk about a big announcement that just came out late last night, NetJets is going to be buying, it looks like, 50 global business jets valued at about $2.8 billion dollars from Bombardier, and you've got options for another 70 global aircraft. If you buy all these, it's going to be retail price exceeding $6.7 billion, and that'd be the largest aircraft purchase in the history of private aviation.

BUFFETT: That's true. Yeah. We— and we did the same thing in small cabin aircraft with Embraer some months ago. So we have committed in two of the three categories, they're still the midcap, and— but we've committed huge amounts in the anticipation of demand that occurs over the next 10 years. Now, you don't build planes overnight, you don't get demand for them overnight. But there will be an increase in general aviation over the next decade, and we have— we think this is a good time to make those commitments. We can make a commitment better now than when the people are selling planes by the— by the— by the bucketload. So there will be— there's some anticipatory activity that we engage in, and some companies may not do that. They may not have the money to do it. But as demand comes on, you will see— you're going to see a pick-up this year. And those figures you quoted about capital expenditures, my guess is that that expands as the year goes along.

BECKY: Right.

BUFFETT: I mean, people— a lot of people don't respond— and you can understand it— until the order comes in the door. But as business picks up, everybody wants to start playing again.

BECKY: Right. Joe:

JOE: Yeah. Oh, I'm just— I'm not going to— not even going to make the comment that he's not investing a lot in any high-speed rail company. But never mind. Not that— that's neither...

BUFFETT: Our trains— our trains— our trains go pretty fast, Joe.

JOE: But— I know. I know. Not that— that's neither here nor there. But aviation does have a pretty good— that's a better way to— you know, if you're going to go between Fargo and Milwaukee, Carl, you don't need to get on a high-speed rail, right?

CARL: How about Tampa-Fort Lauderdale?

JOE: No! No! No! You do not!

CARL: Now, that's just crying out for high rail.

JOE: You do not! Hey, I didn't hear your...

BUFFETT: Joe, let me get...

JOE: Go ahead.

BUFFETT: Joe, let me give you an interesting fig— let me give you an interesting figure. The 800-and-some miles of rail they're talking about in California, high-speed rail, I think they've talked about a cost of 43 billion for that. We bought the Burlington with 23,000 miles of main route railroad and tens of thousands in sidings and all of that, 6,000-plus locomotives, how many cars I don't know, tunnels, bridges— we bought the whole thing, counting debt, for about 43 billion. So as you can see, there's— it's pretty expensive to build that stuff.

JOE: Don't— I understand. It almost sounds like you're agreeing with me. I don't want— I don't want that. Hey. I didn't hear your answer on Auto Nation, Warren, because they were in our ear. Do— you say that's a pretty good business? Is that— did you...

BUFFETT: Yeah.

JOE: Yeah?

BUFFETT: Yeah, my impression— I don't know it in detail, but my impression is that's a pretty good business.

JOE: Becky, did Mike Jackson sign that e-mail, or did he— what...

BECKY: No. It actually came from— it actually came from somebody in our— in— our Washington bureau chief.

JOE: Oh. Oh, oh. I thought he wrote in, do you want to buy...

CARL: Because Mike is in Washington today.

JOE: Yeah. I thought it was signed, `Do you want to buy Auto Nation?' signed Mike Jackson.

CARL: Right.

JOE: Which would have been...

BECKY: No, no, no.

JOE: That— oh, OK. All right.

BUFFETT: No. I would...

JOE: Never mind.

BUFFETT: I would— I would have— I would have sent a car for him if it did.

JOE: Hey, the other thing I was thinking, Warren, I love the phrase "morning in America" and "America's best days are ahead," and you say that all the time. And I— you fervently believe it, I fervently believe it. I'm wondering whether you think American exceptionalism is real, or whether capitalism and the way we practice it here imbues America with that exceptionalism. Is it us, or is it the system itself?

BUFFETT: It's— well, it's overwhelmingly the system itself because human beings had desires to live better lives three or four or 500 years ago, and they were natively intelligent and they worked like hell, they worked harder than we did. So there's always been the human input, but the output really wasn't commensurate with, you know, the quality and the intensity of the input. And then a system came along in the United States which, to a significant extent, believed in a rule of law, it believed in the rule of the marketplace, it believed in equality of opportunity— none of these were perfect, but that system unleashed human potential like never before. And now what you've seen is you've seen other countries around the world in their own way copy it to some degree. And they haven't had to get smarter in a native sense, they haven't had to work harder. They've simply had to have something that let a 500-horsepower motor in the human body churn out something like 500 horsepower instead of only turning out 50 horsepower like it did for millennia.

JOE: But are we declining— is it morning in China? Is it— is it— is it midday here?

BUFFETT: Yeah. It's morning in China, but it's morning in America. I mean, China will grow faster than we're growing, obviously, because they're coming from a lower base. And that'll be true of other countries around the world. But the fact that we can't— you know, it's a little problem I have with Berkshire. I can't— I can't grow Berkshire with a $200 billion market value the same way— at the same percentage rate as I could when it was a few hundred million. But it can still be plenty satisfactory. It— the percentages can't be as great. And the United States cannot grow at the same rate as a China can, but they start from a far, far lower base. And we ought to be happy that they're doing well. It's not a zero sum game in the world. We do not want to be an island of prosperity in— among seven billion people, and have 300 billion people doing very well here and have the rest of the world in— you know, in squalor because that's not a good idea under any circumstances, it's probably not a good idea as a humanitarian. But beyond that, it's not a good idea when some of these other guys have nuclear weapons.

BECKY: You know, real quickly, on that point, Warren, we got a question from a viewer, Ivan in Germantown— I don't know if that's Germantown, Wisconsin. He wrote in, "How concerned are you about the possibility of the dollar losing its status as the world's reserve currency? And how rapid and how severe would you expect the impact of such a change to be?"

BUFFETT: Yeah. Well, the dollar will become less important over time because the— America's dominance of the world economic system will diminish. It doesn't mean we aren't going to be the leading player 25 years from now, we will be. But what— this overwhelming dominance that we've— post-World War II that we— that we've exhibited throughout the world, other countries have caught on to some degree. And, like I say, we should be glad they've caught on. Their people are going to live better because they've caught on. You know, it— the people in China are not smarter than they were 50 years ago natively, they are not working harder. But they have learned how to unleash their potential, and it's a marvelous thing. But the United States is the example to the world.

BECKY: OK. Carl:

CARL: Just sticking with the China theme, Warren, we— everybody's watched you with BYD and trying to gauge your experience in doing business over there. What's the biggest lesson you've learned about Chinese culture when it comes to business, and what is your response to those who really see a property bubble in China that will— that will end in tears at some point down the road?

BUFFETT: Well, yeah, I don't know about their specific markets. I mean, almost any company— any country that flourishes over time will have hiccups, and sometimes major hiccups. I mean, look at the United States. We've probably had 15 recessions since the country was formed, and we've had— you know, we had a very major one here in the last few years with all of our development of thinking we know all about economics and all that. So any— countries are going to have hiccups. The main thing is whether they go totally off the rails or not.

But if you look at China and you look at the physical assets that have been put together in the last few decades, I mean, it just blows your mind to look at the roads and the tunnels and the railroads and the buildings. All of that's been put together. And at the same time, they have accumulated 2.7 trillion of reserves on the rest of the world. Now, think about the United States. When we were building the United States, building the railroads and— right here in this area where I am, we were borrowing money from Europe to do that. It was the smartest thing we ever could do to build capital investment here, borrow the money and then pay them back later as we became more productive. But in the case of China, they have built this incredible amount of wealth, and they have not done it with borrowed money, they have done it while building up 2.7 trillion more than any country in the world in terms of claims on the rest of the world. So it's a remarkable situation. Now, it— whether they have booms and busts in their stock market or their real estate market, I'd be amazed if they didn't. I mean, every developed country that's, you know, whether it's Germany, whether it's the United States, whether it's the UK, whether it's Japan, we've all have significant ups and downs. But if you look at where we are compared to 50 years ago or 100 years ago or 200 years ago, there's really been nothing like it in the history of mankind.

BECKY: Warren, we've got a couple of viewer questions, actually several of them, but I want to bring two up right now about BYD...

BUFFETT: Mm-hmm.

BECKY: ...since Carl mentioned this in his introduction to that question. Ray from Westminster, Maryland, writes in. He says, "Everyone seems to be aware of your investment at BYD— that's the Chinese electric car company. The stock's deteriorated of late and I can't seem to get a handle on the firm's profitability. Are they trying to compete on pricing only, or does their battery technology give them a clear advantage?"

BUFFETT: Well, the battery technology, if it works out like they hope it will, will give them a clear advantage. But battery technology is a evolving and tough game. And my partner Charlie particularly thinks that we've got the right fellow to make the breakthroughs in that— in that area. But it isn't like you get it tomorrow or the next day. And, you know, there are a lot of smart people working on battery technology. And, you know, I— in the— in the end, what I hope is the world gets a great answer on it very quickly...

BECKY: Mm-hmm.

BUFFETT: ...and if it says— if it says "made in Japan," "made in China," "made in the United States," the important thing for humanity is that— is that we get great battery technology. Now, like I say, my— Wang Chuanfu is an amazing guy. I'm impressed with him.

BECKY: The gentleman who heads BYD.

BUFFETT: Who runs BYD.

BECKY: Right.

BUFFETT: And my friend, Charlie, who knows a lot more about batteries than I do, thinks that this guy is the second coming, more or less. So we'll see what happens on that. It's not easy. I mean, when you're dealing with batteries, you know, the weight, the cost, there's all— there are plenty of problems involved, but I will bet significant progress is made by BYD, but there may be more significant progress made by somebody else in the next few years.

BECKY: Tony in San Diego writes in and says that, "BYD has lost more than 60 percent from its peak in 2010. Do you consider buying more shares because of the current discount?"

BUFFETT: No. Well, who knows?

BECKY: OK.

BUFFETT: With the one thing I— you know, you can talk about everything in my life virtually except for what we're buying or selling.

BECKY: OK. So that's a nonanswer.

BUFFETT: Yeah.

BECKY: But, Joe, you've got another question, too.

JOE: All right, we'll always have— always have more. Warren, I'm trying to figure out whether you— we're— since we're on the subject of energy, it's fascinating how we're going to do this as we need more and more. And are you going to play it through utilities and not really think about what the input is for the— for the energy it's going to come from? You're not— you're not smart enough to figure that out, or...

BUFFETT: You've got it. You got it. I'm not— I mean, I'm not good at that. I got through physics OK in college, but that's just because I memorized the formulas. I really never knew why when you, you know, turned a little switch lights went on or the television went on. And I still don't know. So I do not have a mind that really has any special abilities at all, in terms of things physical. So I leave that to others, and I— you know, I just try and figure out whether people are likely to drink more Coca-Cola next year than last year.

JOE: But...

BUFFETT: And I can under— I can understand certain— I mean, I can understand if you're the low-cost guy in auto insurance that— and people have to buy it, that you're going to do very well over time. But I am not good at insights about the future products. And I do not sit and try and figure out trends or any of that sort of thing. And I don't— and I don't pay any attention to people that talk about them because I don't— I don't know enough to evaluate them myself.

JOE: Yeah, but utilities are going to be there delivering whatever it is that generates the energy.

BUFFETT: Sure.

JOE: And so that's your— that's the way you're going to participate in that.

BUFFETT: Yeah.

JOE: Because you have...

BUFFETT: Yeah, they're...

JOE: ...you haven't bought natural...

BUFFETT: They're fundamental.

JOE: You haven't really bought natural gas or oil in the ground or— typically, right?

BUFFETT: Not very often, no. And, you know, it— I don't know— the oil picture five years from now will be to, you know, may be much more dependent on politics than whether I can pick the best geologist in the United States. And, you know, I know we'll be using more natural gas, I know it's got all kinds of advantages and it's cheap on a BTU equivalent to oil and it's cleaner and all kinds of things. But in the end the price depends on supply and demand. And even though demand will go up some, I don't know whether supply's going to go up even faster than that. And so far it's been— the last few years I should say that, you know, natural gas has been pretty disappointing. It hasn't been disappointing in terms of finding it, hasn't been disappointing in terms of its performance, it's just been— there's been too much of it around. And I don't know— I'm not good at figuring out, you know, whether that will change a year from now, or five years from now, and I'm not in that game.

Warren Buffett Speaks
Warren Buffett Speaks

CARL: I do like your point, though, about batteries. And a big— it's a tough hill to storm, but if you could— if you could take that hill and turn batteries into something other than what they are today, that has implications for solar, certainly for BYD. Would you say, Warren, that battery— the evolution of batteries is where you are most leveraged to innovation and tech?

BUFFETT: Well, perhaps. And, Carl, you're 100 percent right. I mean, it— and it's going to happen. It may happen at BYD, it may happen, you know, with General Motors, it may happen in Japan. Lots of smart people are working on it, and you know it's a tough problem because you're got to many smart people and it is proving tough to get accomplished, but it's going to happen. It will happen. And I'm not the kind of a guy normally that makes a bet on who's going to make it happen. I'm just not that— I'm not that good at picking the winner in something like that. I know who's going to win in soft drinks, I know who's going to win in chewing gum, you know, I know who's going to win in auto insurance. But that doesn't really take any great insights. My partner, Charlie Munger, believes very strongly that BYD is the most likely winner in this. He's got a— and he is a lot smarter than I am on this subject and a lot of other subjects. But that doesn't mean I'd shove all my chips out in the table just because Charlie feels that way.

BECKY: Hey, Warren, before we go to a break, I do want to ask you about one more headline that came out yesterday and that does concern Berkshire in a very offhanded way. There's a gentleman named Rajat Gupta...

BUFFETT: Right.

BECKY: ...who was on the board at Goldman Sachs. Apparently he tipped off Raj Rajaratnam about your investment in Goldman Sachs, that it was coming, that big investment during the financial crisis. And Rajaratnam made about 900,000 to $1 million on that trade. The bigger question— I'm assuming you knew nothing about that...

BUFFETT: No, no.

BECKY: ...but the bigger question is, how frequently do you think things like this happened?

BUFFETT: Well, I think they've happened, you know, I've got no idea in the sense of any— but they happen. And one of the things I feel the best about is that, in all of the Berkshire acquisitions we've made, I mean, whether it was Dairy Queen or Flight Safety or Burlington Northern or you name it, or when Disney— when we acquired ABC and then when Disney acquired ABC, if you take the whole record of all the ones that Berkshire's directly involved in, the stocks of the acquired company have actually underperformed in the week before the announcement. Now, we make a point of trying to get deals done fast. I mean, and when we did Burlington, it was from a Friday when I made an offer that Matt Rose conveyed to his directors, and I told them that I wanted a contract by the following Sunday and I wanted to be able to announce it on Monday morning because I— if enough time goes by and enough people get exposed to it, somebody's going to talk. And so far at Berkshire we've been able to do that, but it always worries me because this— as— and when a deal starts out, the circle enlarges and who knows about. That Goldman deal, for example.

BECKY: Mm-hmm.

BUFFETT: The time between when I said I would do that deal and when it was announced was very, very, very short.

BECKY: How short?

BUFFETT: Oh, it was, you know, hours. I mean, and as opposed to a merger or something that might take a couple of weeks. But it's alleged, I think, that the fellow heard about it and then went right out and made a phone call. I mean, if they're going to do that, you know, you're going to have— you're going to have a problem. And I would say that, you know, it's all kind of— just what you hear from other people, but there's been a fair amount of trading on inside information, I think, in Wall Street. There's money in it, you know, and it's tempting to people.

BECKY: Hm.

BUFFETT: It could be a secretary in a law firm, it can be a— it can be somebody at a printer. I mean, it's— there's just— you can't make a deal without a certain number of people hearing about it. Now, at Berkshire, you know, I don't even tell the directors. I mean, I— Mark Hamburg, our CFO, knows about it if I'm working on something. Charlie may know about it. But I just— I'm paranoid about the idea that if we have 20 people that know about something, you know, one of them's going to tell somebody. And they may do it not even to make money or anything like that, they may do it just to show off that they, you know, that they got all this knowledge or something of the sort.

BECKY: Mm-hmm. OK. Well, again, Warren, thank you very much. And we're going to continue this conversation in just a moment. Carl:

CARL: All right, Beck. When we come back, a lot more form Warren and Becky in Omaha. By the way, if you still want to e-mail us, you can today. It's askwarren@cnbc.com. We'll answer some of your questions right after the break

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