CNBC Transcript: Warren Buffett on 'Slowing' Global Economy and 'Salivating' For Deals

ANNOUNCER: Welcome back to this special one-on-one interview with Warren Buffett, chairman and CEO of Berkshire Hathaway. Here now, Becky Quick.

BECKY: Welcome back, everybody. We are coming to you live from GE Capital's Middle Market Summit that's taking place at Ohio State University in Columbus. I'm joined this morning by Berkshire Hathaway chairman and CEO Warren Buffett. And, Warren, you were just talking about how you've been on the prowl looking for big acquisitions around 20 billion or so. A couple of them have fallen through, but part of it is because pricing is so difficult right now. It's...

erBUFFETT: Pricing's difficult and money's cheap so...

BECKY: Yeah.

BUFFETT:...we don't leverage our purchases so we're buying on an all equity basis. But people who do leverage are getting significant portions of the purchase price at very, very low rates, probably as low as they've ever gotten. So that enables them to bid pretty aggressively. And it doesn't factor into our thinking.

BECKY: But you think at this point maybe some of these acquisition prices are getting a little out of control?

BUFFETT: Well, that's the way I feel but, you know, that'd be —that's natural when you're getting beaten out.

BECKY: But you won't raise your prices to compete.

BUFFETT: No. No. We —but —now we've had a record for bolt-on acquisitions. We've probably done, I don't know, maybe 15 different acquisitions, but they probably only add up to maybe $2 billion or something of the sort. And they're good and they fit in with the companies we have, but what I really like is the elephant.

BECKY: So you're always out elephant hunting...

BUFFETT: Absolutely.

BECKY:...with your elephant gun?

BUFFETT: Yeah, yeah.

BECKY: Can you...

BUFFETT: And they're more likely to come along when either money conditions are fairly tight or something of the sort because if you can borrow money at these rates, you can pay a lot of money, and, you know, and other people, if they pay the wrong price, they walk away from them, but if we pay the wrong price, we live with them forever.

BECKY: So if these deals haven't gone through, that means you've been looking more aggressively for stocks to buy in the market and as a result, you've got more cash to do that?

BUFFETT: Well, we're always looking for stocks, and I've got two fellows that are working for me that are really looking for stocks all the time. And —but I usually end up buying more of something I already know. Any new company, any new stock I look at, I measure it against the best idea I've got among the present ones. And I'm perfectly willing to just keep adding to the present ones. So it has to beat them. And I know those companies pretty well so it's a pretty high threshold.

BECKY: Let's go back to IBM.

BUFFETT: Right.

BECKY: You were talking just a moment ago about IBM. Have you added any shares to that company in the last couple of months?

BUFFETT: Maybe —I don't know if it'd be quite a couple of months. We've added —we've added shares this year. We haven't added a lot of shares but we've —well, we've probably added, you know, it'd be in many hundreds of millions. Wells, we probably added maybe a billion dollars' worth this year, something like that.

BECKY: When you first announced your stake in IBM, it caught a lot of people by surprise because you have always stayed away from technology companies. You've said it's something you didn't really understand and so you didn't want to get involved with it.

BUFFETT: Right.

BECKY: What —in looking at IBM, you said it was a little different situation. It made sense to you at that point. I guess part of that is the services factor of it.

BUFFETT: Right.

BECKY: But when you look at these big technology companies, it looks like some of them may be maturing. Have you regretted getting into IBM shares at all?

BUFFETT: No. I'm delighted to be in it. But —and I think they'll probably do better abroad than in the United States over time. But I do —when we buy something like that, I go to our companies and see what they're doing and what they plan to be doing in future years and how tied in they are with given suppliers and how much stickiness there is to it. And so we —I —even though, you know, if you put me in a computer room and spin me around, I'm lost, you know. I'm just hoping somebody comes here and helps me get out. But I do know what our managers tell me about their plans and the degree to which they're involved. I had one manager tell me something —I guess it isn't quite repeatable, nevertheless, in terms of you get pretty locked in sometimes with your —with your supplier.

BECKY: What's not repeatable?

BUFFETT: Well, I asked him how sticky —I won't name the company —necessarily was when you got in there, and he said, `Well, it's like getting AIDS.'

BECKY: So it sticks and it sticks around.

BUFFETT: Yeah, yeah.

BECKY: It really does. You know, I should bring up the insurance companies because we didn't talk about that before.

BUFFETT: They're big.

BECKY: Jim Cramer had said he's very interested in hearing more about what's happening with insurance because a lot of insurance companies have been doing very well lately.

BUFFETT: Yeah.

BECKY: What can you tell us about Berkshire's insurance companies?

BUFFETT: Well, Berkshire's insurance companies are doing well. I mean, we have about 70 billion or other people's money. We call it float. And when we run at an underwriting profit, that money is just like you gave me 70 billion and I get to earn all the money on it. And this year so far we've had an underwriting profit. So not only have they given us the 70 billion, but they've given us some more money to hold it, and we get all the investment income from it. So when insurance is good, it's terrific, and it's been good this year.

BECKY: What do you know about the consumer, not only from the companies you have at Berkshire that you own outright, but from a company like Coca-Cola and from being able to look around the globe to see how consumers are feeling? There's been a lot of pressure on some of these consumer products companies because prices for commodities have gone up and sometimes they can't pass those on to their consumer.

BUFFETT: When you think about it, Coca-Cola's been around since 1886. That's pretty amazing, isn't it?

BECKY: Yeah.

BUFFETT: And it's the basic product. Now it's got a whole bunch of extensions, too. But Coca-Cola's physical volume, not dollar sales but physical volume, was up 4 percent in the first nine months, and that's in a world that's growing maybe at 1 percent. So their per capita usage or Coca-Cola products has gone up almost every year since 1886. I mean, they — (CEO) Muhtar Kent has done a terrific job running that company. It's a huge distribution machine. In Mexico I think the number now is up to over 600 plus eight-ounce servings per capita of Coca-Cola products man, woman and child, which is at least 50 percent higher in the United States, but that —and it grows every year. It grew in the first nine months. It's quite a product.

BECKY: We still have a lot of your other investments to talk about including American Express, Procter & Gamble. We'll get to that in just a little bit, Warren, if you'll hold on with us through another commercial break.

BUFFETT: I'm not going anywhere.

BECKY: Still to come this morning, as we mentioned, we have much more with Warren. We are also going to be talking about everything from the fiscal cliff to Simpson-Bowles. We're going to be adding the man who runs one of the nation's biggest conglomerates. We're going to find out what GE's Jeff Immelt is hearing from customers about the state of the economy. We will find out at the top of the hour. By the way, check out the futures right now. We have been higher throughout the morning. Right now, those Dow futures are up by 42 points after a big down day for the markets yesterday. "Squawk" will be back after a quick break.

JOE: Let's now get back to Becky at the GE Capital Middle Market Summit at Ohio State University in Columbus. She is joined by Warren Buffett and another special guest. Hey, Becks.

BECKY: Hey, thank you, Joe. You know, as you mentioned we have another special guest with us joining us right now. Jeff Immelt, who is the chairman and CEO of General Electric. And, Jeff, thank you very much for joining us this morning.

JEFFREY IMMELT (General Electric Chairman and CEO): Becky, good to see you again.

BECKY: You know, Warren's been laying out for us what he sees from the economy this morning, and GE probably has one of the best vantage points of any company to see what's happening around the globe. I know you talked a little bit about it with earnings but the market seems to have been caught by surprise by what it's been hearing from companies just over the last week or so. What does it really look like out there and do you think the market's overreacting?

IMMELT: You know, Becky, I think the general trend is still positive. There's just volatility as we've kind of climbed out of this recession. I always think about four big factors. The U.S. gets a little bit better every day, we can see that around housing. You know, I think there would be more investment in the U.S. if there was more clarity around the fiscal cliff and things like that.

BECKY: Yeah.

IMMELT: Europe is bad, but not shockingly bad. You know, in other words it's going to be tough, there are still pockets, but Europe's tough. China is —there's not one China, there's multiple economies in China. Construction I think is slow, but if you're in the health care or aviation business in China, it's still very robust. And I just got back from a trip to Saudi Arabia, Abu Dhabi, Algeria, Bangladesh. There's business in all those places, right. So I think if you're out hustling you can find business. So I think the general trend is positive, but there is volatility in the world.

BECKY: But so from that perspective, I mean, from both you, you seem to have a more positive outlook than maybe what the market is reacting to over the last several days.

IMMELT: Look, I think you can't blame investors for, you know, what they read and what they see. And you're going to have a couple of days like what we've had. But if you —if you step back, you know, I think, you know, for a company like ours, our organic growth was up 8 percent on the quarter.

BECKY: Yeah.

IMMELT: That is —that is high, you know, and 10 percent year-to-date on a company our size, that is pretty good. A backlog of more than $200 billion, that's pretty good. So I just —and, you know, we had dinner last night with 20 mid-market companies.

BECKY: Yeah.

IMMELT: Some are doing poorly, but a lot are doing well. But, you know, I just think it's volatile, right, and so you're going to have a day like we had yesterday or a day like we had Friday and people are going to have concerns. Who can blame investors for, you know, for seeing it that way? But the general trend that I see, and we see 140 countries, is still generally positive, with volatility.

BECKY: With volatility.

IMMELT: Yeah.

BUFFETT: And he's getting good prices for locomotives and turbines and all these things he's selling.

IMMELT: Would you like to buy —would you like to buy a few more, Warren, or I could sell you this morning. Get out my order book.

BUFFETT: He's never given me a cents-off sale.

BECKY: Hey, I know Joe has a question as well. Joe:

IMMELT: Hey, Joe.

JOE: Jeff, I'm Joe Kernen with CNBC. We used to be one of your favorites, I don't know, a while...

IMMELT: Joe, 49 percent of —49 percent of NBC is still 100 percent of CNBC. So don't forget that. (GE owns 49 percent of NBCUniversal, CNBC's parent.)

JOE: All right, all right. Jeff, you know, GE Capital, the other report that's like raking in money again and what I'm told is that the company continues to shrink it to some extent I guess to right-size it if you will, but wow, it's making money, it's paying a dividend back to GE again and is there a tendency to want to say 'let's ramp it back up'? And I mean it was a great unit for years and years and years. You know, giving so much profit to the company. Is there a tendency to want to do this? Do you have to pull yourself back and say, all right, we're going to get this to where we don't what to get, you know, get to that point again?

IMMELT: Look, it's a great business, OK? I think the difference in this recovery vs. previous recoveries is just one of discipline. There are segments in financial services that we do better than banks. This is one of them. Mid-market lending, we just do it well. We're going to continue to grow the places that we do better than our competitors and let those grow. I think what's different, Joe, is you know, we're just not going to do the incremental or the —you know, some of the distressed stuff we used to do just because we could and I think we're —you know, we've got a green light on assets we're great at. We're going to continue to grow those. And look, you know, GE Capital in almost every way is healthier today than at any time in its history. We —our leverage is lower, our liquidity is better, our margins are better. And someday, investors will agree with me that this is a valuable business.

JOE: Yeah.

IMMELT: But, you know, we're going to stay in it and there's segments that we're going —we're going to do really well in.

JOE: Yeah. We're —I have one more...

BUFFETT: I was —I...

JOE: Oh, sorry, Warren. We're —Warren and I are both large shareholders in GE and I —we have a lot of questions.

BUFFETT: That's right.

JOE: Yeah, we have a lot of questions about, you know, the portfolio mix as, you know, as shareholders, maybe. I think Warren's got a little bit.

BUFFETT: Joe, if we —if we vote together, Joe, I think we can control the company.

JOE: I'm with you, I'm with you on that. Jeff, my other question had to do with —I mean, we keep talking about the natural gas story and fracking. And number one, I know GE's involved in a big way in all parts of energy production and natural gas. Is the portfolio right now in energy, does it have enough exposure to natural gas, that's my first question. And number two, have you looking out 20 years, has wind become less of a —less attractive long-term because of what's happened with natural gas?

IMMELT: You know, Joe, I think natural gas is one of the big stories of our generation. It's big, it's real, it's a game-changer. We made the decision 10 years ago to be long gas, both from an exploration standpoint and from a power generation standpoint. So we see the trend unfolding. We have a great exposure to it. We think this is a long-term really dominant trend and we love it. We've also made the choice to be a broad-based energy supplier. Wind is going to have its fit, nuclear's going to have its fit, coal's going to have its fit. You know, we paid $200 million for Enron's wind business 10 years ago. Let me tell you, we've generated billions of cash. The cost of electricity of wind is down to 7 to 8 cents a kilowatt hour. So it's going to have a fit. Whether it's in the U.S. or not, you know, remains to be seen, but I'm glad we've got the breadth. But, you know, Joe the big story's gas, let's be clear. The big story's gas and we are super long gas.

BECKY: OK, gentlemen, let me ask you both about the fiscal cliff. We have talked to a lot of business leaders about it. I know it's an issue that you are both concerned about. In fact, yesterday the lead story in the Financial Times, Jeff, was a story that we talked about on "Squawk" ...

IMMELT: Yeah.

BECKY:...about how GE is actually looking to make some moves ahead of that, selling bonds to make sure it doesn't have to be in a position to get caught up in whatever's happening in Washington in that point. How big of a problem is it, what do you think needs to be done? And I'd like to hear from both of you on that.

IMMELT: You know, Becky, the research that we've released today among mid-market companies I think says that they've all slowed down because of the uncertainty.

BECKY: Right.

IMMELT: In the case of GE we're a high-tech, long-cycle business. Boeing depends on us to keep investing in our engines no matter what, so we're going to do that. We're going to keep going. But there's no reason why this can't get resolved. You know, we're a group, we're a member of a group called Fix The Debt.

BECKY: Right.

IMMELT: There's almost 100 CEOs that are parts of that. It basically endorses Simpson-Bowles. I think everybody believes that we're going to be plus or minus 10 percent of Simpson-Bowles. Let's get it done. You know, people say business leaders should be more vocal. Look, we're vocal.

BECKY: Mm-hmm.

IMMELT: You know, this is a —this is a complete distraction at a time —an important distraction at a time when the country doesn't need it. So I just think, you know, everybody is planning. Every business is planning for something that's plus or minus 10 percent of Simpson-Bowles. I don't get it, and you're going to have (Honeywell CEO) Dave Cote on tomorrow.

BECKY: Right.

IMMELT: He's been the leader of this. You know, he's a very respected guy in the business community. It is filled with everybody who's run big companies in the country. We are —we are saying let's get this done.

BECKY: You guys feel like you're talking and Washington's not listening? What...

BUFFETT: Well, Washington's on hold because of the election.

BECKY: Right.

BUFFETT: But they'll not only hear people talking, they'll hear people shouting. There'll be a march on Washington by business if something akin to it. I mean, it's man-made. Everybody knows what the general solution should be and you can argue about whether revenue should be 19 or 18 1/2 percent of GDP or whether expenses should be 21 or 21 1/2 or —but everybody knows basically what the solution is. And Bowles-Simpson fits in there —Simpson-Bowles. We're going to stay away from that acronym of Bowles-Simpson. The Rivlin-Domenici, I mean, there are hundreds of people that could —that you know that could design a sensible plan, and any plan that gets Dick Durbin (Democratic Senator from Illinois) and Tom Coburn (Republican Senator from Oklahoma) to sign on, you know, that reflects a lot of negotiation and effort by two terrific people in Simpson and Bowles. It's going to get done and the American people won't stand for it not getting done. And I —incidentally, I think it'll get done with —I don't mean Simpson-Bowles precisely, but something materially...

BECKY: Some sort of a...

BUFFETT:...close to it will get done by either person selected.

BECKY: And by that I mean, a lot of Americans probably don't even understand what's in it. You're basically talking about a plan that will lower tax rates, strip out a lot of the loopholes or things that we've built in as policy and decided that we want.

IMMELT: Four trillion dollars over 10 years, Becky. It's about a billion four or five of revenue. It's 2 1/2, 2.6...

BUFFETT: Yeah.

BECKY: Of cuts.

IMMELT:...you know, lower the tax rate, broaden the base, you know, global system, stuff like that. You know, we're not going to like —you know, I guarantee we're not going to like all of it.

BUFFETT: No.

BECKY: Right. And that's...

IMMELT: You know, so I guarantee you.

BECKY:...just it. Everybody's going to have something they don't like in it.

BUFFETT: And you got to deal with signing on to it, too, right?

IMMELT: But you know, you know, Warren, I think the beautiful thing about American business is how flexible and how fast we adjust, you know. It just is today the most resilient economic system on earth. And I've seen them all. And business people small and large are going to figure out, 'OK, this is a business I can be in. I can —I can do this, I can't do that, let's go.'

BECKY: But you want a plan, you want to know what it is.

IMMELT: Look, it's just the stakes are so gosh darn high for the country and for all of us. I don't get why we can't do something this important. You know, in other words, you know, I understand there's two opinions on everything, I understand there's Republicans and Democrats. I just think, you know, what I say inside GE is nervous laughter is a bad strategy, you know? It's kind of like 'oh, my, this is really important, I hope something bad doesn't happen.' That's a bad strategy, you know, so I think it's —we just need...

BUFFETT: We're...(unintelligible)...about it at Berkshire.

BECKY: You know, I know Andrew has a question, too. Andrew ...

ANDREW: Hey, Jeff, I'm curious on the issue of Simpson-Bowles, have you scored what GE's effective tax rate would ultimately be and how it would impact the business?

IMMELT: You know, my hunch, Andrew, is that the tax rate goes up probably and I think we're kind of ready for that. But, you know, the notion that you can have a territorial system and have flexibility on cash, I think that's a positive that supersedes everything else. I just think that's —you know, and again, we're not asking for —we're asking for the same system that every one of our global competitors has. Siemens, Toshiba, every one of our global competitors lives in a territorial system. All we're asking is for the chance to compete on a —on a level playing field against those guys. I —you know what I always say, Andrew, is 'look, like us or hate us we're kind of the last American company standing in all the industries we're in.' You know, we compete against global guys in everything we do. Just give us the same system that they've got.

ANDREW: Right.

IMMELT: And I don't think that's too much to ask for.

ANDREW: Hey, Jeff, real quick while we have you, we talked to Warren in the last hour about Bernanke and QE3 and the impact. Your —you were able to see some bonds at some pretty great prices. Are you worried? Warren seemed to suggest that he was a little bit about where we really are.

IMMELT: You know, again, I think as much as anything else as I read what Chairman Bernanke has said there's a sense of consistency in his actions where he has said he's going to keep the cost of money low until the economy gets better and he's been consistent to his word. So if you love him or hate, you know, QE1, QE2, QE3, I think he's been the one person that has led to some consistency around where we are. Now, did business need —when interest rates are zero do you need interest rates lower to borrow money? I don't think so. You know, in other words this is not necessarily the problem we have to solve today, you know? And so I think there's people smarter than I am that can figure that out. But I think if you take that aside and given the gridlock in Washington, it ain't —and what's going on in Europe and other places, it's not bad to have had one person in power who's been more or less consistent from 2008 to today.

BECKY: Yeah.

IMMELT: And I think we at least have to give him credit for that.

BECKY: Absolutely. Gentlemen, very quickly, when it comes to the fiscal cliff, would you each put odds on whether you think we go over this fiscal cliff in January and go over maybe a day or two or something? What are the odds you think we go over in a bad way vs. we find some sort of a solution?

BUFFETT: I would say there's a pretty fair chance we go over for a short period of time. But, you know, who knows? It'll —it depends on which fellow's elected president and it depends on the composition of the House and —but they will —it's going to get done, Becky, and...

BECKY: Quickly.

BUFFETT:...how much —you know, how long they want to be in the sandbox before they come up with answer that's obvious, they can come up with today, that just depends on the personalities of leaders of the House and leaders of the Senate and the president. I don't think it will go on a long time.

BECKY: But you get a...

IMMELT: But if August —you know, Becky, if August of 2011...

BECKY: Mm-hmm.

IMMELT:...hadn't happened I would say the odds were zero, you know, when we —when we defaulted and lost the credit rating. So I think companies have to be prepared that it might happen. But let's be clear, it shouldn't.

BUFFETT: It shouldn't.

IMMELT: You know, let's be really clear. If it does happen, that's a failure of governance and that's something that we shouldn't expect.

BECKY: Yeah, and shame on them if it does happen. Gentlemen, thank you both very much. Warren's going to be sticking with us. Jeff, I know you have to get to the summit here.

IMMELT: We got —we got...

BECKY: A lot of guests.

IMMELT: I got to do some selling —I've got to do some selling, so...

BUFFETT: Yeah, yeah, I'm a lousy salesman so I'll stay.

BECKY: We appreciate your time very much.

IMMELT: Great. Thanks.

BECKY: When we come back, as we mentioned, we will have more from Warren Buffett throughout the show. Up next, though, we're also going to be talking about some stocks on the move this morning. We'll tell you which companies to watch ahead of the opening bell. A lot of earnings out there this morning. Also, a very quick programming note for you. Don't miss a CNBC exclusive interview with Goldman Sachs chairman and CEO Lloyd Blankfein. That is today 11 AM Eastern, "Squawk On The Street." We'll be back after a very quick break.

JOE: And another stock we're going to be watching this morning, Warren Buffett telling us earlier that he's been buying Wells Fargo this week. And that stock has turned up since those comments.

ANDREW: OK. Coming up, we have a lot more ground to cover with Warren Buffett. We're going to get back to Becky and Warren in just a moment.

(Announcements)

ANNOUNCER: Welcome back to this special one-on-one interview with Warren Buffett, chairman and CEO of Berkshire Hathaway. Here now, Becky Quick.

BECKY: Welcome back, everybody. We've been speaking with Warren Buffett all morning long. And, Warren, one of the things we haven't talked about yet is another one of your major holdings. I think Procter & Gamble is maybe your fifth largest holding?

BUFFETT: It could be.