This is part one of an unofficial transcript of Warren Buffett's three-hour long live appearance on CNBC's Squawk Box this morning, Monday, November 14, 2011.
Buffett revealed that Berkshire Hathaway has bought almost $11 billion worth of IBM common stock this year. He also said it is "not clear" that Europe has the will or ability to do "whatever is necessary" to fix its debt problems.
In this section, Buffett speaks extensively about Europe and also talks about a 'depression' for Berkshire companies related to the still-struggling U.S. housing market.
JOE KERNEN: Good morning. The "full Monti." Mario Monti takes over the Italian government after Silvio Berlusconi leaves to a chorus of hallelujah. Boeing lands one of the biggest deals in aviation history. And legendary investor Warren Buffett joins us live for the next three hours to tackle Europe, the markets, and the Super Committee. It's Monday, November 14th, 2011. SQUAWK BOX begins right now.
JOE: Is he there with you right now?
BECKY QUICK in Omaha, Nebraska: He is. He's sitting right here and he's listening.
WARREN BUFFETT: What's a synonym—what's a synonym for "gravitas"?
BECKY: What's a synonym? That's a good question.
BUFFETT: I was thinking some other words.
JOE: Yes. Wow, he looks—God, you look—you look—you look healthy and rosy cheeks.
ANDREW ROSS ANDREW: He looks great, doesn't he?
BECKY: Thank you.
JOE: It's like 5:00 or 4:00 out there, isn't it?
BECKY: It's 5:00 out here, and we are, and we're ready to go. And we were just talking about it and, Warren, you had your thinking cap on early this morning, right?
BUFFETT: Been up for hours, was thinking in the bathtub.
BECKY: And we know what happens when he thinks in the bathtub. The last time he did this he came up with the Bank of America investment, so, guys, we've got a lot of different things we're going to be covering over the next three hours. And, Warren, you're ready to go, right?
BUFFETT: Fire away.
JOE: Has he—has he seen pictures of (Becky's baby boy) Kyle?
BUFFETT: I have...
BECKY: I didn't show him any new pictures this morning, no.
BECKY: I haven't but I will.
JOE: Has he taken care of college yet?
BECKY: No, unfortunately not.
JOE: That was a nervous laugh.
BECKY: But I will show him some of those pictures...
JOE: That was a nervous laugh I just heard from you. Just an idea. I mean, it's not—you know, you're doing this for us. Actually, we owe you anyway. You're right.
BECKY: Yeah, I paid Joe to slip that in for me.
BUFFETT: I see. OK.
JOE: That was pretty...
JOE: You know what you'll get, Becky?
JOE: One of those boxes of See's candies.
JOE: That's what—that's usually—or a brick. That's what he sent me, a brick.
JOE: I'm not sure what that was supposed to mean. Anyway, let's check...
BUFFETT: Joe, you're in my will. It says, "To my friend Joe Kernen, who wanted to be mentioned in my will: hi, Joe."
JOE: "Hi, Joe."
ANDREW: "Hi, Joe."
JOE: Yeah, I'm going to use your—I already stole your epitaph, though, on the tombstone, Warren, and that is, "He lived to be really, really, really old." That's the one I'm going to use.
BUFFETT: I like that one.
JOE: Yeah, that's a good one. All right, we'll get back to you. Let's check on the markets this morning.
BECKY: Come on, we're going to play right in. We're going to jump right into these questions. Warren Buffett is with us for the next three hours. And, Warren, we just heard Ross talking about the situation in Europe. That's been driving the markets for quite a while at this point, and a lot of people feel better now that they see Mario Monti in (Italy) and Lucas Papademos in Greece. Do you feel better about the situation at this point?
BUFFETT: Well, I feel better about those two developments, but they have a situation that—where they found a—kind of a fundamental flaw, which is that they can't print money. And when you have a loss of confidence, that begins a run, which has occurred to some degree on both sovereign debt and banks over there. And it's—in 2008 we had our own run in the United States, and it took—it took the full power of the United States and some very strong action. The ability—or the belief that the authorities would do whatever it took, and we did believe that, and it led us out. But it's not clear who can say, 'We'll do whatever it takes,' over there and that they've got the ability to do whatever it takes. It's going to have to become much more clear as to—as to who can do what and that they will do it, that—they need both the will and the ability.
BECKY: (German Chancellor) Angela Merkel is already pushing for reforms to the EU to deal with exactly that problem. She's hoping to get changes in place and voted on by all the countries that are involved by next year some time. Short of that, do you worry what happens to the euro?
BUFFETT: Yeah, well, runs don't necessarily—markets are stronger than everything. I mean, when you—we've seen that time after time. And used to be when you had a run on banks, you know, that the tellers started paying out slowly and they piled up gold in the teller window. But now you do it electronically and, in effect, just by not rolling over debt, you have runs. I mean, the—there's tens of billions of euros coming due every month in Italy, and you not only need to take care of any added deficit but you have to take care of the rollover. And stopping a run is tough. You don't get half your confidence back. And what would it take if—for you to put your savings in an Italian bank or...
BECKY: Well, I was going to ask you that. You've sold all of...
BUFFETT: We sold—we sold everything. Yeah.
BECKY: ...everything you had in European sovereign debt.
BUFFETT: More than a year ago, yeah.
BECKY: So what would it take for you to go back into these markets?
BUFFETT: Well, we haven't done it. I mean—and it's something I look at every day. And I'm sure people in Italy that have deposits in euros in Italy think, you know, there's something rather strange here when I can get 5X and—or close to a—well, 3X, essentially, in Italy and get X in Germany and they're both denominated in euros. And whether Germans are deciding they'll put their money in Italy, I—you know, I doubt it. It's very, very tough to stop a run. It takes—it takes a belief, widespread belief, that the people in authority will do whatever it takes to stop it and they have the ability to do whatever it takes. We believed Bernanke and Paulson and the president of the United States when they said that in September of 2008 even though the issue was somewhat in doubt. There's no one with comparable authority. And getting 17 people to agree to reforms next year is not necessarily a great answer.
BECKY: You know, you first talked to us about this—I believe it was last spring when we were in India. And you mentioned that you had some serious concerns about the euro and some questions about whether it would break apart. Do you feel better about the euro at this point or more concerned than you were last spring?
BUFFETT: Well, time works against you in this situation because people have become more worried and the spread between everybody else and Germany, even France against Germany, has widened, so that just means the world is seeing the line getting a little longer. And that means, you know, people react with emotion, but emotion becomes reality in a situation like this. So I would say that they're doing some things. And Europe's got all kinds of strengths. I mean, Europe is not going to go away. Ten years from now we will be selling more goods and buying—to Europe and buying more goods from Europe, and they will have more GDP per capita. But getting from here to there may be a problem.
BECKY: You think it's officially a run on Europe at this point?
BUFFETT: Well, it's partially. I mean, you are—European banks are losing US funding, and therefore they're disposing of US assets. They depend more on wholesale funding than on deposits, compared to the United States' banks. They're larger relative to their economies than most US banks. We think our banks are too big, many people. But those banks are even bigger relative to their economies, and they do depend on wholesale funding; and wholesale funding, you know, is not sentimental. And our money market funds have had large investments in European banks, are pulling them down. European banks need more capital, and the sooner they get it, the better.
BECKY: Where can they get it? I mean, if you're talking about a loss in confidence, can they get it from anywhere in the private sector?
BUFFETT: Well, they're stocks are selling at X. Can they sell more stocks—stock at 90 percent of X or 80 percent of X? That was forced on the banks here in the United States. They didn't like it. I didn't like it as a stockholder of banks, but we had—on a Monday, we had Bernanke and Paulson come in and say to, I think it was 11 banks, `You're going to take,' you know, `X billions of dollars.' And before they left the room they did it. Whether they've got that kind of muscle over there, you know, can speak with a—that strong a single voice is another question. But they—the banks can't raise capital. And the government could always say, `Look it, you raise capital or we'll supply the capital, and we'll put it in at one euro per share so you better do it at two euros per share.'
BECKY: Would you be a buyer of some of the banks if they started trying to raise additional capital?
BUFFETT: I'd look. But I—whether I'd be a buyer, I'd have to understand the banks better than I understand them. I—we do not own stock in any banks that are members of the eurozone.
BECKY: Have you been looking at any of these banks?
BUFFETT: I look. Anytime something goes down a lot, I look.
BECKY: Did you see anything you like so far?
BUFFETT: Not enough to write a check. That's the test.
BECKY: So there are a lot of concerns about what happens in Europe right now and how this is going to affect the United States. We spoke with Mohamed El-Erian on Friday and his big concern is that the United States is already nearing a sort of stall level in the economy and that these problems in Europe could really push us into an all-out stall.
BUFFETT: Well, I'd like to comment on the first thing first.
BUFFETT: I think, to some extent, we're not looking at this economy quite correctly in that we have, as you know, more than 70 businesses and some of those businesses have many businesses. So we've really got a cross section of American business. Of the 70 plus businesses, all but about five are doing considerably better than was the case a year ago, and they were doing better then than two years ago. They've been in a steady recovery.
BECKY: What's "considerably better"?
BUFFETT: Well, if you take our five largest businesses outside of insurance...
BUFFETT: ...that would be the Burlington Northern Railroad, that would be MidAmerican Energy, that would be Marmon, which has over 110 businesses serving basic industry, it would ISCAR, which makes cutting tools for—used throughout the world—I mean, it's a barometer of industry—and it would take our new acquisition, Lubrizol. Every one of those companies will set a record for earnings this year. In aggregate they will earn $9 billion pretaxed, and it's a record for all five. And they—and they cut across industry. And if you look at many of our smaller businesses, our recreational vehicle business, our farm business, you name it, they're all doing well.
What is getting killed and what is in a—not in a recession but in a depression is anything connected with residential construction. And that includes things like our carpet business, our insulation business, our brick business. Those businesses are in a depression. You have a huge segment of the American economy that's doing really quite well. Then you have this other segment which is in a depression, and that depression has much more effect on unemployment, I believe, than is generally realized. When that comes back, and it will come back—I don't know when, but it will come back—when that comes back, when we get a million housing units, annually, started, I think unemployment will go down a lot.
BECKY: When you first started looking at some of these things earlier this year, you had said maybe by the end of this year we'd start to see a turn in housing.
BUFFETT: Looks like I was wrong. That—that's one of the problems of appearing on these shows. No, I—we don't see any evidence, but that's—in a sense that's good. I mean, we have—we have households, and we have housing units. We built way too many housing units compared to households. Surprise, we had this huge inventory. We're now creating more households than housing units. We're drawing down on the inventory every day. I don't know how long that takes. I know when it's through, when we've reached something close to a balance, that we will have at least a million households being formed annually. We'll have at least a million housing units being created, and unemployment, in my view, will be a lot lower.
BECKY: OK. I think Joe has a question for you from Studio 2. Joe?
JOE: Yeah, Warren, it—based on this piece [subscription required] in The Journal today about all the developers that bought all this farmland. Like, they were paying, like, 90,000 an acre for it, so now all the farmers are coming around and they're buying it back for—this is perfect. You know, sell high, buy low. They're buying it back for 10, 15, 20,000 an acre instead of 90. You have said many times that if you could own, vs. gold, all the farmland in the United States, you'd rather have that than all the gold in the world. Have you gone in and looked at any farmland, any real estate like that?
BUFFETT: No. I own one farm that I bought about 25 years ago my son farms, and so we're exposed to farming in the Buffett family. He's going to take care of me if it turns out that farms are really the thing to have instead of businesses. But I believe in owning productive assets...
BUFFETT: ...whether it's farms, apartment houses or businesses. And they'll do very well over time, and sometimes one class is doing better than another. But if you own any of those things over the next 20 years in the United States, I think you'll do well.
JOE: I'm wondering if you've decided how to play also—and it would be a big help—maybe you haven't because it just—there's so many political considerations, but the—you're big in utilities. I understand that. That makes a lot of sense. But whether it would be renewable or natural gas or clean coal or just buying oil assets, is there a way to just—to game the system for the future of what we use for energy?
BUFFETT: Well, through that American energy—I believe that our two utilities are the top two industrial utilities in the United States in terms of their ownership in wind generation, and we are just in the process of negotiating a contract on some solar. I got a call on Saturday that we just got approved in Iowa for some additional wind generation as well, so we're in that field. In terms of oil, it's kind of interesting. If it turns out that oil becomes worth far more money, that helps our railroad enormously because trucks use approximately three times as much diesel fuel per ton mile carried...
BUFFETT: ...as railroad. So we might—we would be a huge beneficiary if it turns out that oil rises in price...
JOE: Yeah, it would...
BUFFETT: ...but I—go ahead.
JOE: No, it was just based on the (delay of TransCanada's planned Keystone) XL last week, I've seen now that Canada might go to Asia with a lot of the oil, and I was just wondering what you thought of the, you know, delaying that XL pipeline and whether that factored into any investments you have.
BUFFETT: Well, it doesn't factor in to anything. It's a very hot issue, obviously, in Nebraska. I am no geologist. I don't understand, you know, what the effects might be, so I stay out of that one just because I—there's all kinds of things I don't understand.
BUFFETT: And you've just hit on one of them.
BECKY: Although the question became that was laid out in the Journal on Friday last week is this is 20,000 potential jobs vs. the environmental impact and with that prism, do you think that the administration focuses on jobs as much as you think they should be?
BUFFETT: Well, you can say if you build anything—if you build a tomb for me, you know, if I start building a huge tomb, and I employ 20,000 people to haul granite blocks across the plains of Nebraska to build this tomb, which will make everybody forget about Egypt, that creates jobs, too. But everybody cloaks everything in job creation.
BUFFETT: So I'm very suspicious when people say, you know, `This will create jobs,' and `If I open up a hamburger stand, it'll create jobs.' So it—there's a lot of rhetoric there that gets a little loose. If you're really seriously hurting the environment, you know, you can—you can have those 20,000 people start building me a tomb.
BECKY: Instead. OK. Andrew's got a question for you, too. Andrew?
ANDREW: Hey, Warren, I want to go back to housing for a second. Given your views on where you had hoped housing would be at the end of this year, and the fact that we're not there yet, do you think there's a role either for government or that the banks need to be playing it a different way than they are to either refi or to modify the way these loans have been put together?
BUFFETT: Yeah. Well, refi doesn't really change the number of housing units or change the number of households, but it certainly changes the burden of the payments on somebody that, you know, is financing at 6 and could finance at 4. So I think things that help people refi that have good credit histories and all of that sort of thing, I think—I think that could be quite useful. It doesn't change the basic equation. The one that...
ANDREW: Do you think the banks aren't being helpful enough?
BUFFETT: Well, it isn't so much the banks. I mean, Freddie (Mac) and Fannie (Mae) are, you know, have guaranteed close to half the mortgages. You would need them more than anybody else to have a policy on refis. They—they're the ones that affect a very high percentage of the smaller mortgages. The banks may service those mortgages for Frannie—for Fannie and Freddie, but they're just their agents.
ANDREW: Would you like to see Fannie and Freddie take a more aggressive approach? Would you like to see the president try to mandate some kind of approach for Fannie and Freddie in terms of how they deal with these mortgages?
BUFFETT: I would be in favor of anything that took people who had been making payments regularly, but because their house doesn't qualify in terms of value to get refied, but to let them make similar payments, for example, and have a greater amount apply against principal, but I—you've got to be very careful with these programs because people learn how to game them very quickly. So it makes it very important how you—how you draft them. But certainly somebody that's paying 6 1/2 or 7 percent interest pays it straight through, their house is under water, and they're going to keep making the payments, I would—I would try to get them in a market rate, if I could figure out a way to do it without having a whole bunch of people game the system.
BECKY: Hm. You know, there are a lot of questions around how you can fix the housing market, if there's any way to fix it, aside from just waiting. Ben Bernanke is another key player in this and maybe we can talk about that in just a moment, but we have a new mandate here on Squawk Box, we have to take commercial breaks.
BUFFETT: Oh, how capitalistic.
BECKY: Exactly. How unfortunate and how capitalistic. So let's slip in a quick break and when we come back, we can talk a little bit more about that. And, Joe, I'll let you take things away from here.
JOE: Yeah, I do remember—we used to not with Buffett, we wouldn't...
BECKY: Yeah. I think we got caught on that.
JOE: Yeah, he could—he could buy all the advertising on the show. I'm trying to get, you know, I've got a lot of ideas for spending more Warren's today.
JOE: I don't know why. Anyway, coming up, much more from Warren Buffett live from Omaha.
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