WHEN: Today, Monday, February 25th
WHERE: CNBC's "Squawk Box"
Following is the full unofficial transcript of a CNBC interview with Berkshire Hathaway Chairman & CEO Warren Buffett on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today, Monday, February 25th. Video from the interview is available on CNBC.com.
All references must be sourced the CNBC.
BECKY QUICK: All right. Yes. Let's bring in our special guest this morning. Berkshire Hathaway chairman and CEO Warren Buffett joining us-- just after writing his annual letter to shareholders. And-- Warren, this is a big deal. It's something that the investment community-- kind of waits on and-- sees as a must-read because you spend so much time actually it yourself--
WARREN BUFFETT: Yeah, too much.
BECKY QUICK: When do you start writing the letter?
WARREN BUFFETT: Well, this one I--started very earlier-- very early because I had one section in mind. It turned out to be the last section when I talk about the American tailwind. I probably wrote that in-- late summer. And-- then I work around different sections. But-- it-- takes a long time. I am not a first draft writer.
BECKY QUICK: Well, for people who have been reading this for a long time, this letter was markedly different than you've written for the past three decades or so. Because at the top, the opening of every letter-- in the past to this point has been-- Berkshire's percentage change in book value--
WARREN BUFFETT: Right.
BECKY QUICK: --as the measure that you thought was most important. This time, you kinda stripped it out and said, "It's not the most important metric anymore for a couple of reasons," one of which Berkshire has changed so markedly. But also-- you just think it's-- not gonna be the way that you'll be measuring things in the future.
WARREN BUFFETT: No, it's not-- the more relevant-- figure at least over time. Not in any one-year period. But basically it's market value. Because we have become overwhelmingly an operating company. And we hope to become even more so than-- a company that-- really have a lot of stocks and bonds. So-- I've-- actually talked about that in previous reports. I wouldn't have wanted to quit in a year where I got clobbered by the one I was dropping with adopting one that made me look good. So-- I actually included 'em both in. And it was a good year to-- make the transition. And-- you said it's different. It-- I've always had the image that I am talking to my sisters. I have two sisters. They're both-- Berkshire's pretty much their whole investment. They're smart. They're not active in business. So-- they're not reading about it every day. But I pretend they've been away for a year and I'm reporting to them on their investment. And then this year because we may be repurchasing shares, I tried to have the vision that they were talking to me about whether they should sell their shares and I was explaining to them exactly how I would look at it if I were in their shoes. So-- it's, "Dear Doris and Bertie," at the start and then I take that off at the end. But I'm talking to them. And I'm trying to talk to 'em in a manner where if-- you know, they're practically entirely in Berkshire and if they were thinking of selling some, here's what I'd want 'em to know before they made a decision.
BECKY QUICK: To do that, you used-- a new-- description for--coming up with it this time, which was the idea of having five groves. You being maybe a timber company and having five groves that Berkshire's really invested in. You broke down-- and looked at each of them on a case-by-case basis. One being the-- non-insurance businesses that Berkshire owns. Another being the equities-- bunch that you have. The final one's the insurance companies, but you also have treasuries and cash that you're holding. What am-- oh, and then businesses that you own part of, not all of—
WARREN BUFFETT: Right, jointly.
BECKY QUICK: --would be the five groves. That's pretty interesting. How'd you come up with the idea of just the groves? Because it is something that-- somebody who's not so steeped in business can get their head around pretty easily.
WARREN BUFFETT: Yeah. Well, Berkshire, you know, has dozens, and dozens, and dozens of companies. And-- when analysts look at it, you know, they wanna go out and figure out, you know, how many boxes of Valentines we sold, you know, in our candy company. And you can get totally lost in terms of looking at the forest by trying to look at every tree. cause some of the trees are flourishing, some of 'em are decaying, and some of 'em are huge and important, and others are more or less twigs. So I thought I would group the assets in a way that was logical and where you could sorta figure out-- the valuation that you might attribute to that particular grove. And-- I think it's a lot better than trying to describe-- 80 or 90 businesses with three hundred and-- what? Close to 390,000 employees. I mean, we're in one of the businesses right now. And this is a very interesting business. But we've got Jordan's in Boston. We've got Star in Houston. We have RC Willey. And to go through every one and tell 'em about the latest store we opened and it's much better just to look at 'em in groups because they make sensible groups.
BECKY QUICK: To that point, this is the Ask Warren show, and we have gotten a lot of questions that have come from viewers, some from Berkshire shareholders, others from people who are just longtime watchers. I'd like to bring up a question that comes from-- Marcelo P. Lima . He-- writes in, and I think this comes from Twitter, "Mr. Buffett, in your letter you note that some of Berkshire's trees are diseased and unlikely to be around in a decade. Which ones do you have in mind, and how do we prevent healthy trees from joining them?"
WARREN BUFFETT: Yeah, well-- I did say that. And-- but I would not name the ones that have major problems just from a morale standpoint. With the we're gonna keep running 'em. And-- but they-- we have companies that are on the downswing as well as on the upswing. And-- it would be-- it just-- it would be very tough. And-- the ones that are, as I call it, diseased, they're a very, very, very small part of our earnings. You'd-- gain nothing analytically, and you'd have a hundred people go to work today feeling, you know, "Well, we might as well give up," or something of the sort. So I don't like to name 'em specifically, although you could probably figure some out by-- looking at our list of companies. There's-- some companies are just in the wrong industry. I mean, you know-- if you made-- you know, whatever it may-- well, even making televisions in this country, I mean, that was a hot industry, you know-- when I was young. And-- we don't do it anymore. We sell a lot of 'em here at our store, but-- so I would not like it if I were working at Company X and-- my boss had just got through saying, you know-- "You're in decay."
BECKY QUICK: You do name some of the big redwoods that you consider to be-- essential to the grove though. I--think you said that-- Berkshire Hathaway Energy and the railroad, Burlington Northern Santa Fe, are two of the biggest redwoods that stand in the groves.
WARREN BUFFETT: Well, they're big. They're big. And-- both set records for after-tax earnings last year. Combined, they earn-- right around $8 billion after tax. And $8 billion's a lot of money to us. That's a third of our operating earnings. We earn twenty-four-- a large fraction-- of operating earnings last year. $24 billion. And-- those two companies alone earned $8 billion. Now, Berkshire Hathaway Energy also has multiple companies. But the BNSF Railroad is just one big railroad.
BECKY QUICK: Let's talk about that operating profit number. It was $24.8 billion. But on a gap basis, what you're now focusing on, it was $4 billion. And that comes because of an accounting change that came into play this time around. It was $20.6 billion paper loss on your investment holdings that you now count back in from the huge amount of securities that you own and then also the $3 billion write-down on Kraft. You go out of your way to emphasize again that you don't think people should be looking at these gap earnings even though you're reporting them that way.
WARREN BUFFETT: Yeah, we say the same-- well, that's the final gap earnings. The $24.8 billion also are gap earnings, but they're operating earnings. And-- I think they were-- we had outside tailwind on that. But-- they were 41% greater than any year we've ever had on operating-- earnings. But-- beyond that, we have this large portfolio of stocks and also the write-down on Kraft-Heinz. But mainly it was the portfolio of stocks. And-- we've made a lot of money over-- in stocks over time. But there's been years-- when we've lost money, too. And I-- tell the shareholders that-- that we expect-- to make money on stocks over time. We haven't got the faintest idea what years we'll-- be up or down. And then they changed the rule last year so that unrealized-- gains or losses are recognized through gap income. That had not been true-- for dozens and dozens and dozens of years before. So that changed our figures. But I-- that's why I explain-- that's why I tell Doris and Bertie what's happened in accounting during the year as well as the business.
BECKY QUICK: But you should point out this time it was a decline of more than $20 billion. There will be quarters where you'll see a huge upswing. And you don't think people should pay attention to the upswing either –
WARREN BUFFETT: No. Absolutely not.
BECKY QUICK: That these are just fluctuating numbers.
WARREN BUFFETT: No, no. They should pay attention to how we do over ten years in the stocks we own. But actually the way the rule works now, every minute it's recorded earnings, it's mark to market. And we're buying stocks that in some cases we will hold ten, twenty, maybe even longer years. And those companies are retaining earnings. They're reducing the number of shares. They've got a lot of things going for them. And I would, you know, I have bet a lot of money. We had $173 billion of equities at year end. And I love having those. And they will make us money over time. But I have no idea what they'll do in the next year or two.
BECKY QUICK: All right. Let's talk through a few other questions that have come in from viewers just regarding Berkshire while we're here. Eric LeFante wrote in and said, "Warren, how have you structured Greg Abel and Ajit Jain's compensation now that they oversee dozens of different businesses?" You did point out that you think the business is much better run now that those two are vice-chairmen, each running their own set of companies.
WARREN BUFFETT: Yeah, our proxy will be out very soon. Shows what they received. I think unless there's some calendar quirk or something like, that they will have each received $18 million last year. And the base salary is a high percentage of that. And then a bonus is discretionary with me. But they're doing a fabulous job.
BECKY QUICK: Bonus is discretionary just based on—
WARREN BUFFETT: Based on how I wake up in the morning, yeah.
BECKY QUICK: On that same sort of—
WARREN BUFFETT: That may be the only one you'll read about like that in our proxies.
BECKY QUICK: There's another question that comes in regarding Greg and Ajit that says – this is from Rational Walk. A suggested question on Monday. "Given that Abel and Jain are not only responsible for running most businesses but also vice-chairmen, shouldn't they be up on stage along with Charlie at the annual meeting? Many of us would like to hear from them."
WARREN BUFFETT: Yeah, well, you will hear from them more in the sense that they will be up front with microphones ready to take on any questions that come. You know, it's not going to be that many years where the two of us are up on – and they will be up on the stage when we rearrange the format. And rearranging the format means rearranging me and Charlie to some degree. But it's logical for them. And I hope lots of questions get directed to them at the annual meeting because we'll feed them into them. I should mention one thing about their comp. There's this rule, and I may not be giving it to you exactly proper, but there's a rule for public companies that you get to deduct only a million dollars unless – for compensation – unless the excess is tied to some formula. So everybody pays, you know, you can be running the super company of all time, and they tend to range the base salaries so they're a million or $2 million and then call the rest something that qualifies under the IRS where they get the deduction for it.
BECKY QUICK: I didn't know that's—
WARREN BUFFETT: Oh yeah. Oh, believe me. Every company knows it. And their employment consultants know it and everything. So you have all these salaries, but then they have something that makes it very easy for them to make a lot more money. And that money is deductible whereas I don't think what we pay in the way of excess – I think it's over a million – is deductible. But, I mean, it would be a joke. And so we are paying them a fair amount of money, I believe, that's not deductible, whereas at almost any other company you see, they're designing it so that it is deductible.
BECKY QUICK: I always wondered why base level—
WARREN BUFFETT: The base salary is – yeah, it's ridic –
BECKY QUICK: $775,000 or million dollars. I didn't know that's why.
WARREN BUFFETT: I mean, it's so transparent. But it makes everybody feel good. They passed it, I don't know, ten or twenty years ago. And immediately everybody, "oh, we just had this revelation that now that you're really only worth a base salary of a tiny amount," you know? And it came to be about designing something like this. You know, and I said, "You know, it's just a joke. I mean, we're not going to pay them a million dollars a year." So, you know, they've got huge responsibilities. So you will see a little different situation. I think the bonus I give them that I think it was 16 base and two bonus. I think the two is probably deductible.
BECKY QUICK: So 6:19 on the East Coast and you're already making friends. Well done. Let's get to another question from the audience. This comes from Brian Chan. He asks, "How are Ted and Todd's performance since they joined about eight years ago?" The money managers who are there. "Have they –" Ted Weschler and Todd Combs – "Have they performed better than index? Charlie said recently that most money managers did not add any value compared to an index."
WARREN BUFFETT: Yeah. The first few years, each of them they came at a slightly different time. Maybe a year to a year and a half or something. Different times. And they got well ahead of the index, and they got paid compensation. Now, they got paid so it came in thirds, so that it could be clawed back – two thirds of it if they'd missed the second year and so on. Overall, they are a tiny bit behind the S&P each by just almost the same margin over the same time.
BECKY QUICK: Over the entire period?
WARREN BUFFETT: Over the entire period. And the entire period's a little different for both of them. They now manage about $13 billion each. They've done better than I have. So I—
BECKY QUICK: Well, that's a good measuring stick.
WARREN BUFFETT: Yeah. So no, it isn't a measuring stick. But I mentioned it because if I don't, somebody else will. So, you know? They also – both of them – have done an incredible amount of work in terms of acquisitions, and Todd in particular on our medical venture. Anything at Berkshire – we made an arrangement with Lee Enterprises in terms of managing our newspapers. Ted handled all that. I mean, you know, he got my approval on it, but a million details. And they both have contributed all kinds of ways to Berkshire. But it has been a tough time to beat the S&P. But that's the deal we've got with them. And they've got a small carry-forward of deficiency to make up. I mean, they had some clawed back earlier. They made pretty good money for a few years. Substantial. Some of it clawed back because of the three-year put-back arrangement. And then now they've got a small carry-forward.
BECKY QUICK: Okay. Another question that came in—
WARREN BUFFETT: But they've done better than I have, Becky.
BECKY QUICK: Tony Dickinson writes in "What changes should we expect from GEICO with the transition from Tony Nicely to Bill Roberts? And how do they approach leadership differently?"
WARREN BUFFETT: They're two peas in a pod on that. I mean, they've worked together so long. They're so compatible. They have the same feelings about GEICO. I mean, nobody can quite match GEICO's – Tony's feelings about GEICO, but there's just no change. I was at a meeting of GEICO that they had maybe forty of their top executives. And everybody went around, introduced themselves, and gave the length of time they'd been with GEICO. I think the shortest time any one of those people said was 19 years.
BECKY QUICK: Wow.
WARREN BUFFETT: GEICO grows its own.
BECKY QUICK: We are here at the Nebraska Furniture Mart, and we're going to talk more about a story I think you have from Mrs. B., Mrs. Blumkin, the founder of Nebraska Furniture Mart, coming up a little bit later. Right now, we're going to take a quick commercial break. When we come back, we were also going to talk to Warren Buffett about the big drop in Kraft-Heinz shares on Friday. We'll talk about the markets, we'll talk about the economy, and much more. Right now though as we head to that break, let's take a look at the biggest pre-market winners and losers in the Dow.
BECKY QUICK: Welcome back to a special edition of Squawk Box. We are live in Omaha, Nebraska with Berkshire Hathaway's chairman and CEO, Warren Buffett. Warren, we're just sitting down with you for the first time since the news last week that Kraft-Heinz put out. There was so much news it's hard to even summarize it all.
WARREN BUFFETT: Yeah.
BECKY QUICK: They came out with earnings that missed expectations. They said, "By the way, it's not gonna get better in 2019." They revealed that there's an SEC investigation taking place into accounting. They wrote down the value of the brand by just over $15 billion. Were you surprised by any of this news? What did you think of what happened? 'Cause the street was surprised. The stock was down over 30%.
WARREN BUFFETT: Yeah. Well, I may have learned a week or ten days before about something -- like the SEC investigation. I'm not-- I'm not on the board, but Greg's on the board. And I talked to Greg. And Greg had been talking a lot to the head of the audit committee. And he's a terrific guy. Jack Pope. But the write-down-- I do my own write-downs in my mind. So I was not surprised by that, although-- the accounting firms look at write-downs a little differently than I do. But I would not argue with 'em on it. And I can give you some math that would substantiate it. I've been watching-- I was wrong in a couple ways on Kraft-Heinz. But the-- I think we talked the GLIDE luncheon time about the packaged goods brands losing some ground against the retailers.
BECKY QUICK: Was that just over a year ago?
WARREN BUFFETT: Six months ago. The GLIDE-- well, the packaged goods companies are always in a struggle with retailers. My-- our family had a grocery store for a hundred years. And we-- then we didn't have much bargaining power. But the really strong brands, they can go toe to toe with Walmart, or Costco, or whomever it may be. But the weaker brands tend to lose out. Now, the interesting thing about Kraft-Heinz is that it's still a wonderful business in that it uses about $7 billion of tangible assets and earns $6 billion pretax on that. So on the assets required to run the business, $7 billion-- they earn $6 billion-- roughly after depreciation pretax. But we and certain predecessors, but primarily we, we paid $100 billion more than the tangible assets. So for us, it has to earn on $107 billion, not just on the $7 billion that the the business employs. And we don't have a way-- it would be a wonderful if we had a way to deploy another $7 billion and earn $6 billion, but it isn't there. So I think that when you're going toe to toe with a Walmart, or a Costco, or maybe an Amazon pretty soon and-- you have a modestly good brand, maybe one where the trend's a little against it or something like that, you know, you've got the weaker bargaining hand than you had ten years ago. The really classic situation is this if you think about it, Becky. Heinz was started in 1869. So it had all that time to develop various products, particularly ketchup, things like that. The Kraft part of it's a little more murky, but it goes back to C.W. Post in 1895. Those companies have brought all kinds of brands out. All kinds. You know 'em. You had 'em when you were a kid. You have 'em now, some--
BECKY QUICK: Raisin Bran, sure.
WARREN BUFFETT: --some of 'em. They've been distributed worldwide through tens and hundreds of thousands of outlets. They've had hundreds of millions...they spend a fortune on advertising. And their sales now are $26 billion. Costco introduced the Kirkland brand in 1992, 27 years ago, and that brand did $39 billion last year whereas all the Kraft and Heinz brands did 27-- $26 or $27 billion. So here they are, a hundred years plus, tons of advertising, built into people's habits and everything else, and now Kirkland, a private label brand, comes along and with only 750 or so outlets does 50% more business than all the Kraft-Heinz brands. So house brands, private label, is getting stronger. It varies by country around the world, but it's bigger. And it's gonna keep getting bigger.
BECKY QUICK: Okay. A couple of questions on it. First of all, does that mean you overpaid?
WARREN BUFFETT: Well, we did overpay. We didn't overpay for Kraft. I mean, for Heinz--
BECKY QUICK: For Heinz.
WARREN BUFFETT: We bought that originally. It was a 50-50 deal. It was private. And--
BECKY QUICK: A 50-50 deal with 3G.
WARREN BUFFETT: Pardon me?
BECKY QUICK: With 3G.
WARREN BUFFETT: Yeah, with 3G. We had two stockholders. And then we overpaid for Kraft. And we wrote down $15 billion of that. And that-- you know, and that's the CPAs' work-- way of looking at it. Actually, the markets marked it down more than that. And probably quite properly. The thing to remember is-- you know-- you know how the stock doesn't know you own it. You pay $10 for a stock, it goes to $8, and you think, "If it ever gets back to $10, I'll sell it." You know, and if it goes up $20, you say, "I can take-- sell half of it and take all my money out." All those things are nuts. But in business, if we paid $7 billion for Kraft, which is all it takes to run the business, it would still earn the same amount as if we paid the $100 billion premium. The stock-- the business does not earn more just because you pay more for it. And we not only-- after buying Kraft, everybody started speculating about the things we'd buy. So the prices of everything went up. And then on top of it we paid large premiums for it. And we misjudged it.
BECKY QUICK: I hear what you're saying about the house brands and the competition from places like a private label brand that Costco puts out. But what about just millennials' changing habits? How much of it is that younger consumers don't want the brands that their parents and grandparents wanted?
WARREN BUFFETT: There's some change in habits. But if you think about it, people don't really change their habits that much. If you try to think of the billion-dollar brands that have been created in food and they're private label, there's very few billion-dollar brands being created in food. Some have did it in yogurt probably. You know? But you don't really see-- that has not been a huge change. Physical volume hasn't changed much. The ability to price though has been changed. And that's huge.
BECKY QUICK: We had an analyst on last week on Friday talking about what she perceived as the problems with Kraft-Heinz. She said she thinks they're under-investing in the business. I mean, that's kind of been 3G's way, to cut to the bone. And that's how you make this profitable. But she thinks the brands have been under-invested in. Would you agree with that?
WARREN BUFFETT: I don't think so. But that's hard for me to tell. But see-- well, I was on the board. I mean, I saw lots of innovation on different products. And you saw them advertised to some extent. I do not think, but I don't know this for sure. But I think if you take the ten largest food companies, I think in innovation-- they've tried a lot of things. But how many things work? If you look Kellogg and General Mills and go up and down-- Coca-Cola, I mean, how many new products really become big? You read about 'em and all that. But take Heinz Ketchup. You know, it's got 60% of the ketchup market. It's got higher percentages in other parts of the world. And it's a very, very, very strong brand. Philadelphia Cream Cheese is a strong brand. But other brands are weaker. And you are right certainly that in certain categories, maybe in a Kool-Aid, or Jell-O, or something like that-- you know, they go back 75 years or something. And there's some secular trend against that. But that isn't the key. I mean, they cut costs not in innovation, or in product quality, or anything like that. They just took it out of SG&A basically. Now, they may have made a mistake in terms of working-- I shouldn't say "they." We may have made a mistake in terms of trying to push hard against certain of the retailers and finding out that we weren't as strong as we thought they were-- we were.
BECKY QUICK: Let's go to one of the questions from viewers because we got a lot of questions related to--
WARREN BUFFETT: Sure.
BECKY QUICK: --Kraft-Heinz. This one's number T5. Someone named J.C. Dominguez wrote in, "Is this the type of incident and time when you buy more Heinz? Or do you pull the plug?"
WARREN BUFFETT: Oh, we don't pull the plug on them. We've never sold a share of Kraft-Heinz. And if we sold or bought, it has to be reported within two days. So we wouldn't be able to do anything significant. But it isn't our style. We are the partners with 3G on it. And so we have exactly the number of shares we had before. And I guess I should never say never-- at age 88 in terms of what somebody else might do. But I can tell you I have absolutely no intention of selling. I've got absolutely no intention of buying.
BECKY QUICK: Why wouldn't-- if you're sticking with the business and it's 30% cheaper today, why wouldn't you buy more?
WARREN BUFFETT: 'Cause it isn't worth as much.
BECKY QUICK: So you think it was a fair write-down that the market gave it?
WARREN BUFFETT: Well, at 35-- you've got a billion, 200 million shares out. So that's $42 billion for the equity. And we own $30 or $31 billion. So the whole company is selling for $71 or $72 billion. And as I mentioned, it has about $6 billion of operating income. Now, for $6 billion, would you pay a lot more than $72 billion where it doesn't look like it's going to be going up for a while? Maybe even-- well, they said it was gonna go down in 2019. You know, there are other things I think where you get more for your money and better prospects. Not that I regard the prospects for Kraft-Heinz as terrible. I may be-- I would-- if I had to bet one way or another, I think people will eat more of our products this year than last year.
BECKY QUICK: But if you see better places to deploy money, why don't you sell?
WARREN BUFFETT: We-- well, A) we can't as a practical matter move around tens of billions of dollars that easily. But beyond that I mean, if we're working with a million dollars or $10 million, would I have a position in it? No. You can move around with a million or $10 million. And Ted and Todd can move around reasonably well with $13 billion. But that can be difficult. $173 billion, I mean, you dance like an elephant. Not like some guy on Dancing With the Stars.
BECKY QUICK: We have a lot more questions that have come in regarding the partnership with 3G and 3G's style of doing things, but we'll get to that in just a little bit. In the meantime, we have to take another break.
WARREN BUFFETT: Okay.
BECKY QUICK: When we come back, we do have much more from Warren Buffett, including his thoughts on Berkshire's Apple stake, what he thinks about the markets, too. Right now though as we head to a break, let's take a look at Friday's S&P 500 winners and losers.
BECKY QUICK: This is a special edition of Squawk Box, live from Omaha, Nebraska. We are speaking to Berkshire Hathaway chairman and CEO Warren Buffett. The economy, the markets, trade talks, and much more. Find out where the legendary investor is putting his money to work and what he has his eye on this year.
JOE KERNEN: Good morning. Our top story, President Trump announcing yesterday he would-- delay an increase in U.S. tariffs on Chinese goods. He cited progress in the trade talks and said if it continues, there would be a summit. They would plan a summit at Mar-a-Lago. As a result, stocks in Shanghai surging overnight, up 5.6%. U.S. equity futures at this hour, sharply higher this morning as well, up triple digits. As you can see, up 140 on the Dow Jones. The S&P up about 11. NASDAQ up 38. We're not that far from some new highs. Pretty amazing. Right now, let's get back to Becky Quick in Omaha with Warren Buffett. And, you've got important things to talk about. I don't know if you've talked about March Madness yet, Beck. But, you know, he--
BECKY QUICK: Nope, we have not.
JOE KERNEN: --he-- he--
BECKY QUICK: Do you want to jump in with that?
JOE KERNEN: Well, no. We can at some point. But, you know, he always, like, offers up these things. Like, they sound attractive. You-- but, you know, you could win something, and he never pays off. Ever. Anything. I mean, last year I think it was-- I think it was to get to the-- what--
BECKY QUICK: It's because nobody wins.
JOE KERNEN: --to get to the Elite 8 or something. Let's think about a way where--
WARREN BUFFETT: No, no, we-- we always -- we always have a sure winner, Joe. Last year, it-- it's true the favorites got knocked out early. But-- but we did split-- there's a $100,000 consolation prize for whoever does the best. Now, that got split eight ways last year. But-- but the year before, we had five people that came within one game and just to the last games of-- of winning the million-dollar prize. Now, if they'd won the million, they would have had to have split it if all five had won it. But there's a million-dollar prize. And we're going to do it again this year. And we limit it to employees of--
JOE KERNEN: I know.
WARREN BUFFETT: -- of Berkshire. But close personal friends of mine who have a brick also may be entitled to enter. I don't know.
BECKY QUICK: Joe, he invited you to enter last year, and you didn't do it.
JOE KERNEN: No, no. No, we were doing other things where-- where-- depending-- let's do it again this year, Warren, with—with the Creighton versus Xavier thing. Because they both have losing sort of records, and they-- they're-- they're not doing quite as well. Although Creighton just beat Georgetown. And yesterday, Xavier just beat-- Villanova. I don't know if you saw. It was pretty good. So let's do something there, and let's-- let's see. There's a NetJet card I could think about. I don't know what the payout—
WARREN BUFFETT: Well.
JOE KERNEN: --is gonna be, but let's see who goes further.
BECKY QUICK: You can get another brick.
JOE KERNEN: Yeah, exactly. If I'm lucky--
WARREN BUFFETT: I get-- I get 30 s-- I get 30 seconds on the program versus a NetJet membership for you. Is that it?
JOE KERNEN: Kind of.
WARREN BUFFETT: I'll tell you what I'll do. I'll let you name the bet, and I will let you name the stakes. And-- and-- we'll go from there.
BECKY QUICK: Whoa.
JOE KERNEN: Really?
WARREN BUFFETT: This is the honor system, Joe.
JOE KERNEN: You know--
WARREN BUFFETT: Yeah.
JOE KERNEN: --okay, let's do that.
BECKY QUICK: Now, you're talking his language.
JOE KERNEN: But, you know, he's very crafty and very smart. Like, he-- he sent me a NetJet card. It had my name on it, but it was absolutely useless. It was like-- you know, it was like-- I used it as a luggage tag. It was-- it wasn't worth anything. And--
BECKY QUICK: Well, you said-- you said NetJet card. You didn't say it had to work for flights.
WARREN BUFFETT: That's a starter card. That's a starter card, Joe. We've got big things planned for you.
JOE KERNEN: I do have great things to talk to you about. I'm worried, I mean, I think you think the market's expensive, Warren. So I want to talk to you about that. I mean, you don't like to say that. And you say long term it's going to be fine. But you've got a lot of metrics you're looking at there, like the-- market cap to GDP or GNP. That-- that looks expensive there, right? I mean, there are things that look expensive, and you're having trouble finding things. So-- you know, you need to be honest with us about that.
WARREN BUFFETT: The market—
JOE KERNEN: Is it really expensive?
WARREN BUFFETT: Joe, if-- it depends on interest rates. We've talked about that before. If you tell me that 3% long bonds will prevail over the next 30 years, stocks are incredibly cheap. Because even-- you know, I mentioned that Kraft-Heinz earns $6 billion on $7 billion in tangible assets. Even if you pay $70 billion and you earn $6 billion on it, that's better than having $70 billion on it and 3% government-- interest rates govern everything. And-- and if there were a way to short 30-year bonds and own the S&P for 30 years, I would give you enormous odds that the S&P is going to beat 30-year bonds. Now, we've had this period of extended long-term low rates not only here but around the world. And now, it looks like we're not going to jack them up very fast. So, we may be in a new world, the world that Japan entered back in 1990. And if so, stocks will, when we look back on it, will look very cheap. But, you know, this has not been the history of the United States, to have these continued low interest rates. So, I -- there's no-- if I-- if I had a choice today for a ten-year purchase of a ten-year bond at whatever it is or ten years, or-- or buying the S&P 500 and holding it for ten years, I'd buy the S&P in a second.
BECKY QUICK: Well, that-- that brings us to a question that a viewer wrote in. This is T-67. @PiyushPant says: "From the annual report and the 13F, it looks like Berkshire was the least active in the public markets in the quarter when the stocks were the cheapest. You also did fewer buybacks in the fourth quarter when Berkshire was cheaper. Was taking the foot off the gas in the fourth quarter a conscious decision?" And based on what you just said-- we got all these signs that-- that looked like the Fed was not going to be raising rates in the fourth quarter, too. So why wasn't that a buy signal for you?
WARREN BUFFETT: Well, I-- I thought stocks were a buy in the fourth quarter, just like they did in the third, and second, and first quarter. But sometimes we have other things in mind, too, that may use a lot of money. And sometimes they work out, and sometimes they don't. But-- but--
BECKY QUICK: Wait. Does that mean you were holding your cash in case a deal came through?
WARREN BUFFETT: We had at least one deal possibly. It wasn't very large. And, so, we-- I like stocks in the fourth quarter. But-- I like-- I would like buying a business even better.
BECKY QUICK: Is that still--
WARREN BUFFETT: And incidentally, I-- I did say in the annual report that we expect to be buyers-- net buyers of stocks in this year. We have not been net buyers, I should point out. I mean, the market's gone pretty much straight up. I still think stocks are more attractive, but I have trouble buying it when every day it's up.
BECKY QUICK: The deal that you just mentioned, is that potentially still on the books?
WARREN BUFFETT: No.
BECKY QUICK: So it's not--
WARREN BUFFETT: I don't think-- I don't think it is. No.
BECKY QUICK: Is it a deal here in the United States?
WARREN BUFFETT: Yeah, "Is it bigger than a--" yeah.
BECKY QUICK: Is it bigger than a breadbox--
WARREN BUFFETT: I-- I just-- I'll-- I'll give you a hint. It's on this planet.
BECKY QUICK: So, you went out of your way in the letter to say that you do think buying businesses outright is more expensive, even though you don't think stocks are too expensive here.
WARREN BUFFETT: No-- no question that, yeah--in this-- in stocks now, you have-- or businesses I should say you have a huge, huge, huge buyer. And-- that's not only-- and companies are eager to buy, too. But you also have private equity. And if, I don't know whether private equity-- it's-- it's flexible because they can call on their partners for more money and all that. But let's just assume that they would have a trillion available. Now, they use a lot of leverage. They call themselves private equity, but they're really private debt, you know, to a great extent. But that trillion might buy as much as, say, $3 trillion of assets if it's leveraged with $2 trillion of debt. Well, the total stock market is something like $30 trillion. And if you take the top five companies, you knock another-- or six companies, you knock four or five-- $4 trillion off that. So you're down to something where the buying power of private equity plus just the normal buying power from companies that want to get-- it's just a huge amount of competition.
BECKY QUICK: When you start looking around, is that-- do you think the private equity companies are overpaying for this? Or can they--
WARREN BUFFETT: Well, I think they'd--
BECKY QUICK: --make it work?
WARREN BUFFETT: --rather not. I mean, they obviously want to make the best deals they can. But they are in a game that is so much more competitive than it was for them. If you go back to a 1970s when. you know, when-- leveraged buyouts started, which are the same thing they're doing now but the name kind of lost its appeal there at some point. But the deals you could make then were enormously more attractive than the deals you could make now.
BECKY QUICK: Let-- me ask you one more question that came in from a viewer. You've-- you've kind of answered this, but there-- may be a little more to the answer. This is T-84, for the control room. Nic writes in: "Why didn't a large acquisition happen for Berkshire during the fourth quarter 2008 selloff? Are you anticipating a much bigger decline in the market?" Or was-- I guess maybe it was the timing of it. Maybe it was so quick.
WARREN BUFFETT: Yeah. Well, there, too, in-- in 2008, for example, we were going to buy Constellation Energy. We ended up buying the stock and making some money on it. But-- but that was part of a deal. When Constellation fell apart, and it was in the fall of 2008, both-- I was watching the tape. Dave Sokol was watching what was going on. And we practically called each other at the same time. And he was on a plane with Greg to Baltimore.
BECKY QUICK: Greg Abel?
WARREN BUFFETT: Yeah. That day. And-- and we contracted to buy it. So we-- we were-- we were ready to buy that. And we-- we tried on other things. And we-- but-- but we participated in marketable securities big time at that point, too, as you know. We spent-- I think we spent $16 billion in three weeks where-- when nobody else was spending anything.
BECKY QUICK: When was that? What--
WARREN BUFFETT: Well, between about September 15th and October 7th or 8th. And then we already had another $3 billion committed to the Dow, which was not going to get taken down until later on. So we went through our cash pile pretty fast. Too fast actually.
BECKY QUICK: You have a huge cash pile right now though. What is it--
WARREN BUFFETT: We have a huge cash pile.
BECKY QUICK: $112 billion?
WARREN BUFFETT: Yeah, we're-- yeah, we're--
BECKY QUICK: And that doesn't even count the other $20 billion in cash-like--
WARREN BUFFETT: No, that does count it. I mean, but the $110 billion or something like that, that-- that--
BECKY QUICK: $113 billion, whatever it was, yeah.
WARREN BUFFETT: Yeah, that-- that-- that counts $20 billion. And, you know, I never get right down to $20 billion anyway. But-- but we've got a lot of cash. And we'd love to use it. But we're a private equity firm that's going to borrow six or seven times what they call EBITDA, which I don't use as a metric-- they're gonna pay more than we are. And, you know, as I said, we-- we pay too much for cap-- if you pay too much for something, it doesn't accommodate you by earning more money to make you look good. It-- it earns what it earns. And if we'd paid-- if we'd paid $10 billion less for Kraft, it would have still earned the same money, you know, basically.
BECKY QUICK: Right. This is a question that comes in. This is F-7, control room. Doug Wofford writes in: "Warren, when you come across bad news on a holding, for example Kraft-Heinz, can you share the sequence of criteria you use to determine if the stock is on sale and buy or a bust and to sell? What really concerns you as-- as what is in-- what-- as to what is in back of a dip?"
WARREN BUFFETT: Yeah, the stock market is there not to instruct me. It's there to serve me. So if it if there's bad news and the stock goes down, the question is in my-- I have is-- is the long-term valuation changed? And-- you know, there was-- well, there was certainly bad news at GEICO when we bought it, for example. But there was bad news in American Express when I originally bought it back in the '60s. It was the investment partnership I ever made. So what you like is bad news about a fundamentally good business. And then you going to make sure that it's still a fundamentally good business. But, no, bad news on a good business. We're better off because Apple stock is down significantly from where it was four or five months ago than if it stayed there. Apple will probably-- they may not, but they have said they're going to down to cash neutral. They could do it either by acquisitions, or dividends, or repurchases. And my guess is it'll be mostly repurchases. They are about $130 billion away from cash neutral now. If the stock were at $200, it would buy 650 million shares. If it's at, you know $150, you buy close to 900 million shares. We're way better off, you know, if it's at a lower price when they're repurchasing shares. Our partners are selling out to us, and they're selling out cheaper than otherwise. The worst thing that can happen from our standpoint with Apple is that it sells at $230 or something like that because we don't like buying as well at that sort of price.
BECKY QUICK: We have a lot more to talk about with Apple. There are a lot of questions that came in from shareholders on that, too, or from viewers on that. But we are coming up towards the top of the hour. And to make sure that we make this a good business, Joe, I'm going to send it back to you right now.
JOE KERNEN: Okay, Beck. Thanks. We have a lot more obviously coming up. Still have two more hours with the oracle, Warren Buffett. We're going to talk-- a lot more about his biggest holdings and his view on the market-- and the economy and much more, and what the Green New Deal would do for Berkshire Hathaway. I just-- it boggles the mind. We'll see. Squawk Box will be right back.
BECKY QUICK: This is a special edition of Squawk Box live from Omaha, Nebraska. We are speaking to Berkshire Hathaway chairman and CEO Warren Buffett. The economy, the markets, trade talks, and much more. Find out where the legendary investor is putting his money to work and what he has his eye on this year.
JOE KERNEN: Plus, all of this morning's headlines and market-moving news as the second hour of Squawk Box begins right now.
JOE KERNEN: All right, Warren Buffett's annual letter to shareholders released-- over the weekend. Let's get to-- Becky Quick. And at some point you gotta find out if he has a favorite-- did he vote in the Geico contest? Does he have a fa-- I-- the cavemen are still my-- politically incorrect and--
BECKY QUICK: Oh, oh, of all of-- all the ads? No, me too. I'm glad you g-- that they brought those back.
JOE KERNEN: And did you notice-- ask Warren if he's noticed, all these other insurance companies that used to be so serious, they're all tryin' to do comedy now. There's-- one where a guy has these stupid-- he's ridin' a bike and he's got these disgusting calves that they-- they're all doin' comedy 'cause it worked so well for Geico.
BECKY QUICK: Warren?
JOE KERNEN: Has he noticed--
WARREN BUFFETT: The camel, I think, is winning-- the contest--
BECKY QUICK: Oh you know, I liked him too--
JOE KERNEN: Is it?
BECKY QUICK: "Mike, Mike, Mike, Mike, Mike."
WARREN BUFFETT: Yeah, the camels-- yeah, it-- well, I was back at Geico ten days ago and the camel was running while I had--
JOE KERNEN: Yeah-- you should win some type of--
BECKY QUICK: I- get that.
JOE KERNEN: --of mad-- you know, Mad Men or advertising m--
BECKY QUICK: Mad Men.
JOE KERNEN: You-- singlehandedly-- you know, turned that into-- you know-- people need to do that. If-- I mean, Geico-- what the heck is a Geico? It's a government and m-- you know, it woulda gone nowhere, but you ramped up all that ad spending and look at it now. So I mean, you-- really-- it's sort of a -- they owe you, the whole advertising industry.
WARREN BUFFETT: I'm-- Joe, I-- am so glad that you remembered that I was the one that came up with the idea of Geico-- the Geico-- I-- the gecko. I mean-- people--
JOE KERNEN: That lizard--
WARREN BUFFETT: --people at Geico seemed-- people at Geico misremember that entire-- they think it was their idea, and I remember I sketched that little--
JOE KERNEN: Isn't that the way it is--
WARREN BUFFETT: --guy out and said, "Why don't we try the g--" I thought it was crazy--
JOE KERNEN: That happens on the show a lot, I know. We don't-- neither one of us get credit where we-- you know, the people forget what we do--
WARREN BUFFETT: Yeah, I know that. Yeah, well our day'll come--
BECKY QUICK: It's the heavy lifting. Hey-- Warren, let's talk a little bit about what Joe was just talking about. Joe, stay there because I know you wanted to ask about BYD, that might play into this. The trade talks with China. How big of a deal is that? What have you seen on your companies, on your investments?
WARREN BUFFETT: Well, I see the monthly reports from the companies come through, and-- a fair number-- you know, not in insurance at all obviously, but-- a fair number of 'em are-- the tariffs have had some impact. Now we're talkin' 10% tariffs-- and they-- a number of 'em say if it get-- if it were 25% there'd be some big adjustments. Some of it the suppliers have swallowed over in China. -- some we split with 'em, but it's-- it pushes prices up. I mean, there's just-- there's no question about that. But it hasn't had a big effect at 10%. A number of 'em told me at 25%, I mean, the world changes. You either get a lot more money for your product, or you source it differently, or you do something.
BECKY QUICK: So are you relieved to hear of the deadline being extended, being pushed off? That March 2 it's not all gonna go to 25%
WARREN BUFFETT: Well, I'm relieved at the idea that there's still some chance that sense will prevail. I-- the-- it is bad for China, it's bad for us-- if we get into some kind of a trade war. And---- you know, negotiations are tough and something like this is-- a big deal to both-- both countries. And to some extent you're playing a game of chicken and-- because it hurts both countries. And I generally think when two very smart countries have something very important at stake they'll end up making rational decisions. I mean, I've been figuring that way with the Russians ever since-- you know, the nuclear bomb. The-- even though you get all kinds of tensions and-- people generally figure out what's best for themselves, and the best thing for both China and the United States is to work out something-- sensible that both sides can live with.
BECKY QUICK: Did you think there was a valid reason for amping up these negotiations, for saying, "Hey, hey, hang on a second. We're not getting a fair shake?"
WARREN BUFFETT: Well, I think we haven't been getting a fair shake to some degree. But I think we can sustain-- I mean, to some extent-- the United States can do things that no other country can do. So-- as I think number of smaller countries, for example, if they wanna run trade surpluses with us, I mean, and the-- and it strengthens their economy, it doesn't hurt us that much. I mean, I think we've got a role to play in the world that way, but I don't think we can be Uncle Sap either.
BECKY QUICK: Joe, you have some breaking news?
JOE KERNEN: Yeah, out of-- General Electric-- breaking to a lot of us that-- realize GE had-- this much money-- tied up in biopharma. The company General Electric is selling its biopharma business to Danaher-- kind of interesting-- Danaher for $21.4 billion, and $21 billion of that will be in cash. GE says it's gonna use the proceeds-- to reduce leverage-- strengthen its balance sheet. It expects the deal-- to close during the fourth quarter-- of this year. And it-- there's a lot of-- you know, there's a lot of comments about how-- you know, from Culp about how this-- is in keeping with their plan to-- reduce leverage-- strengthen the balance sheet-- and-- all the other things. The deal-- Danaher meanwhile sees the deal adding $0.45 to $0.50 to adjusted earnings per share in the first full year and-- instead of us talkin' about this-- Becky, me or you, I guess-- we should get Warren's-- comments on what he thinks of this move--
BECKY QUICK: Let's do just that. And I do wanna bring up-- this is something, Warren, that we got viewer questions about too, randomly. GE-- control room T102, Brian Savage wrote in, "Mr. Buffett, given the recent turmoil of GE do you believe Larry Culp is the right man for the job? And if you could advise him what would you inform him he should do? Lastly, if he is the guy why haven't you invested in a company like GE given your current funds?"
WARREN BUFFETT: Yeah. Well, I think he should sell-- the medical operation for $21.4 billion to Danaher. I mean, that sounds-- I-- think that-- that GE should deleverage. No great insights there. I-- they believe the same thing, I'm sure. So-- they just-- they owe-- they owe more money than they should at present, and they should sell assets to some degree, not in a fire sale at all. And this is not a fire sale price. So I-- applaud what they-- what was just announced And-- I met Larry had a terrific record-- at Danaher, at-- and-- you know, we are a big customer of GE, we are a big supplier of GE. You know, I've had some connection with the company for decades, and they did call us in 2008 when they needed money. And-- so-- I think all America's cheering for GE, but I'm certainly one of those that is cheering.
BECKY QUICK: Have they called you more recently?
WARREN BUFFETT: Well-- I've talked to them off and on over the last year or two, but I've said the same thing, pretty much-- is what I'm saying right here.
BECKY QUICK: Joe, you have other questions on this front?
JOE KERNEN: Not so much-- on that. I got a lotta things obviously that we wanna talk about. And I guess Warren probably does know GE pretty well. I-- does he have-- I'd like a little more color to his comments on GE. He probably doesn't wanna do that. What do you-- what's your expression? What do you say? "You--criticize by-- just generally, but you praise by--"
BECKY QUICK: "By category--"
WARREN BUFFETT: "Criticize by category, praise by name," yeah. But--
JOE KERNEN: Yeah, yeah, yeah. So I-- guess I can't get you to just slam GE--
WARREN BUFFETT: --I-- have not read-- I-- have not read their 10-K--
JOE KERNEN: --or Immelt or anything, huh--
WARREN BUFFETT: No, no. No, you'll never get me-- you'll never get me to do that. no--
JOE KERNEN: What a mess though right
WARREN BUFFETT: And-- -- I haven't seen their 10-K yet. I mean-- I wanna get their 10-K as soon as I can. And-- it may be-- it's probably out just about now. And that's the documents you have to read.
JOE KERNEN: A lotta stuff, its up about 50% from the lows, I guess--
WARREN BUFFETT: And givin' you some clues about--
JOE KERNEN: --more, huh?
WARREN BUFFETT: Yeah--
JOE KERNEN: More than that, yeah?
WARREN BUFFETT: But it's-- - you know, it's—selling -- the equity's selling for about $100 billion. And-- then they have-- they actually have a preferred issue that's $5 billion or $6 billion. Most people don't even know about that. And then they have-- they had-- you know, something over $100 billion of debt. I'm consolidating GE Capital, but I think that's the way to look at it. And they've got-- they've got a couple of very good businesses. So-- but-- they were-- they were overleveraged and they've gotta reduce the leverage, and-- clearly they're doing it.
JOE KERNEN: I mean, you could write a check for that--
BECKY QUICK: Warren, there's a question that comes in f--
JOE KERNEN: --Warren. You could write a check for that, Warren, if you really liked it.
WARREN BUFFETT: That-- that's true.
JOE KERNEN: It's true that you could, but you won't be. Okay. I'll-- just-- paraphrase
BECKY QUICK: There's a question that came in from a viewer-- and I ask this because we're talking about GE and it's one of many companies that's looking at unfunded pension liabilities, potentially down the road. This is T54 control room, Brian Bannon writes in, "How do you see the unfunded pension liabilities across the United States affecting our economy over the next ten years?"
WARREN BUFFETT: Well, if you're talking about the corporate sector-- the unfunded liabilities have been working their way down because all the new companies don't go for defined benefit plans. So you've got-- you know, if you take the four or five largest companies in the United States they don't-- they don't have defined benefit plans. We have bought a number of older companies. So we have-- we have a fair number of companies with defined benefit plans. We wouldn't start any defined benefit plans. But that-- it's not a huge problem in corporate America. I mean, you have a Sears in the pension benefit guarantee, court gets involved. But-- and there'll be others. But-- - it's way less of a problem than it was ten years ago or 20 years ago. In the public sector, you know, it's a disaster. And-- you know, some of the-- it's interesting to me when they talk about these relocation problems, you know, and New York and Amazon, all that sort of thing, you know-- I-- if I were relocating into some state that had a huge unfunded pension plan I'm walking into liabilities. 'Cause I mean, who knows whether they're gonna get it from the corporate income tax or my employees-- you know, with personal income taxes or what. But that-- that liability isn't gonna-- you can't ship it offshore or anything like that. And those are big numbers, really big numbers. And they may come--you can delay a long time. I mean, they-- you're getting pushed maybe somewhat. But the politicians are the ones that really haven't attacked it in a good many states. And when you see what they would have to do-- I say to myself, "Why do I wanna build a plant there that has to sit there for 30 or 40 years?" 'Cause I'll be here for the life of the pension-- plan-- and they will come after corporations, they'll come after individuals. They-- just-- they're gonna have to raise a lotta money.
BECKY QUICK: I mean, when you say that the states that come to mind, having not looked at those statistics in a while, would be Illinois and New Jersey at the top of the list.
WARREN BUFFETT: Well, as I say I praise by name and-- criticize by category.
BECKY QUICK: Well, let's talk about the decision of Amazon to say, "Forget it," to a second headquarters in New York City. We were with Charlie Munger on that day. This was-- February 14, just-- a week and a half ago. We were with Charlie Munger the day that announcement came out, and Charlie had some pretty-- firm comments on it. He said he thinks it's crazy that states like California and others are basically driving the rich people out. What do you think about it?
WARREN BUFFETT: Well, I-- heard Charlie on that, and as he says They-- don't have kids. They don't--" and-- a good many of 'em are charitable, they tend to get the things that are around them. And they don't use the services-- nearly as much relative to their taxes that they pay as the average person. And they-- so they use the hospitals. No, I obviously-- well, a state like Florida which has no income tax attracts a lotta rich people, you know? And--- in Texas-- you know, when people - relocate there, the fact that-- that-- there's no income tax-- is a real factor. And-- I don't know about those two states specifically, but I have a feeling that their retirement plans are in pretty good shape compared to the old industrial states. You get legacy liabilities when you move in. Nebraska's in very good shape-- that-- for a long time-- that we've really been against the state having any debt. Now we're all about leasing some.
BECKY QUICK: Well-- you-- what we're talking about is state versus state. You're now talking about some new taxation plans that are being-- recommended in Congress, or by specific senators or congressmen-- that are similar to some of those policies that we've seen in the states. I mean, if you just run through it-- Elizabeth Warren with her wealth tax, and anybody over $50 million. AOC, Alexandria Ocasio-Cortez, with her plan to tax anything above $10 million at 70% rate. Bernie Sanders with his estate tax going up to 77%. If those policies are enacted on a national basis do you see that same sort of trading off where people would potentially leave the United States? What do you think about these plans?
WARREN BUFFETT: Well, that's an interesting question. I would say this: If tomorrow everybody in the world had a chance to make a one-time change in where they lived, two billion families all over the world, only time they're gonna get the chance to make the change, but they will get transported free to any country they wanna go their family, and have citizenship. What do you think's gonna happen tomorrow?
BECKY QUICK: A lot of people coming to the United States.
WARREN BUFFETT: A lot of people are going to come to the United States. Very few people are going to leave. North Korea might have a small decrease in population. I mean, the point is, I mean, this is an incredible country. And it's true that right now we're raising $3.3 trillion and spending probably $4.3. We're about to have a debt – a deficit of about $1 trillion in a very good year in the cycle. I mean, year of prosperity, and that's 5% of GDP, and that's probably more than – you could actually take a 2% to 3% deficit and not have the ratio of debt to GDP growth. Five in prosper shares, we're out of whack on that. So we, you know, you can cut spending, you can raise taxes. But I would say that the wealthy are definitely undertaxed relative to the general population.
BECKY QUICK: But your answer to that – that was almost a dodge of the question. I mean, if these policies drive out the wealthy people, sure. If you got your choice of where to go, everybody would want to come to the United States. But would the wealthy people do that if we changed our tax structure?
WARREN BUFFETT: Well, I think most of the people that have – the rich people, Mark Rich being one of them. I mean, they leave because they – in this case, I mean, he's leaving before the feds pick him up. And I don't think if you offered most of the rich people – if they were sane anyway – and you said "If you stay we're going to take half your net worth, and if you leave, you can take it all with you," and you're 88 years old like me, am I going to leave the United States? You know, I could move – South Dakota has no state income tax, Wyoming has no state income – so we've got two states that border Nebraska. Nebraska has a 7 and a fraction percent state income tax. If Iowa, which is right across the river, had no income – I wouldn't move. I mean, now, I think people want to come here. I think if you made that offer I made the United States, there'd be more people come to the United States than anyplace else. And they would come if the deficit was $1 trillion or $1.2 trillion. I mean, this is the land of opportunity.
BECKY QUICK: But do you think they're good policies? Do you think they're good tax policies?
JOE KERNEN: Warren, you're making a decision to leave all your money to the private sector in terms of charities. And because you think – I assume you think – maybe it'd be better spent there than by the government. Isn't it possible that it's just not the right idea to just – what's already a bloated, you know, what some people would think, a bloated entity – address the spending side of things. Or else maybe you ought to reconsider if you think the government is so good at spending money, why leave it all in the private sector? Go ahead and give it all to the government and let them do it. You seem to have an idea that it's better treated if you do it philanthropically.
WARREN BUFFETT: I've got about four choices, Joe. I mean, let's say I have $80 billion. A) I could spend it all, you know? But even to spend it all, I would have to sell Berkshire stock. So I would incur taxes of, you know, $20 billion or so in spending. So the government would then get 20 if I wanted to spend it all I could – I don't know what in the world I'd spend it on. I can give it all to my wife and then there's no tax. I could give four million people $20,000 each and there'd be no – well, there'd be no tax on it as long as I give make gifts to separate people up to $20,000 I can do it, and there's no tax. One thing you could do, the estate tax is the wealth tax. I mean, in theory you get taxed on wealth on the estate. Now, you're allowed to give to charity 50% cash, 30% appreciated stocks and have it deductible from your income. They let you essentially deduct all the gifts of wealth at death. So you could have a limitation that you could only give 50% to philanthropy and treat it the same way actually as if you're giving away from income during your life. There's a lot of things you can do with the tax law. I mean, the tax – and I think that one way or another, when the forms for a hundred have gone from $93 billion to $2.7 trillion since 1982, the market system, as it gets more specialized, will give more and more to the top people. If we were back in 1800 and we were all working on farms, you'd probably be worth a little more than I am because you'd work harder and be stronger. But the top person working on a farm would be worth one and a half to maybe two times what the bottom person was. But as we get more and more specialized, the guy that's the best in knocking out some other guy that weighs 200 pounds is, you know, is worth $30 million a fight. Now, he's worth $30 million a fight because somebody invented television and Cablevision. As we get more specialized, the rich will get even richer. And the question is: how do you take care of the guy who's a wonderful citizen and father, you know, may have died at Normandy or something, but he just doesn't have market skills? And I think the earned income tax credit's the best way to address that question. And that means probably some more taxes – it should mean some more taxes for guys like me, and however you come at it I'm fine with.
BECKY QUICK: Okay. We'll continue this conversation. Obviously inequality's a big issue and it's something that's already roiling politics in Washington at this point.
WARREN BUFFETT: Yeah.
BECKY QUICK: We can talk more about that in just a little bit, but Joe, we'll send it back to you because I think we need to take a break, too.
JOE KERNEN: We do. All right, coming up thanks, Becky. A recap of this morning's market headlines, including GE's deal with Danaher. It's a big one. Plus much more from Warren Buffett. Stay tuned, you're watching "Squawk Box" on CNBC.
JOE KERNEN: Breaking news out of GE, which we told you about earlier. The company's selling its biopharma business to Danaher for $21.4 billion, $21 billion of that in cash. GE says it's going to use the proceeds to reduce leverage and strengthen its balance sheet. Expects the deal to close during the fourth quarter of this year. There you can see Danaher is sharply higher on the news as well. On adjusted earnings it will add to Danaher's results, $0.45 to $0.50 in the first full year, although on a reported basis it will cut EPS by $1.15 to $1.20. GE will still have a go forward health care business of $17 billion-- because some of the-- the health care portfolio of GE isn't going. Pharmaceutical Diagnostics will remain-- with-- with GE. Danaher's going to borrow some-- issue some debt, use cash on hand-- to make-- the acquisition, which-- is part of Culp's—strategy to reduce debt, strengthen the balance sheet, and reduce the leverage of General Electric, which is now up almost 12% on the news. And remember, it was down, I think it broke under 7 briefly in its most recent tough sliding that we saw at the end of last year. But-- so if you base-- 7% as the low you're all the way back to almost 12%. So big move if you were able to buy GE right at the lows. In a major deal-- in the drug sector, Roche is buying Spark Therapeutics for $4.3 billion, about 140-- $114 a share for Spark. That was 122% premium, the Friday closing price. Spark working on treatment for hemophilia and Huntington's Disease. Already has one drug on the market to-- treat a rare genetic condition-- that causes blindness. When we return much more from Warren Buffett and Becky Quick in Omaha. We will be right back after a quick break.
BECKY QUICK: Welcome back to a special edition of Squawk Box. We are live with Warren Buffett, the chairman and CEO of Berkshire Hathaway in Omaha, Nebraska. And Warren, thanks again for your time this morning. We've talked about a lot of things so far, but we have not gotten your take on the economy to this point. There was just a Federal Reserve report out on Friday that suggested that GDP for 2018 is probably going to come in slightly below 3%. What do you think the economy is doing right now, just based on your businesses, based on the receipts you see, the companies that you track that you have major purch-- major shares in?
WARREN BUFFETT: Right now-- just based on the monthly statements I get, and some cases I get other data in between, but, overall things are a little better. I mean, the rate of-- the rate of improvement has tapered, but it certainly hasn't flattened. Now, that could change next month. And—and home construction, has been disappointing. But most of our businesses-- I've seen other figures on retail that are strong and-- you know, including Walmart's. But I would say our retail figures in January were not strong. But January's a peculiar month. That can be affected a lot by weather, although any retailer will always blame things on the weather. I-- no, right now things look fine.
BECKY QUICK: When you say it's-- it's a little better that's relative to when? What's your comparison period?
WARREN BUFFETT: Well, I'm-- I'm saying that if it developed as I see in January and February for the whole year, I think we would probably beat our $24.8 billion, but that would depend on insurance profits because it could swing either way, they are--
BECKY QUICK: Of your operating profit that you just reported?
WARREN BUFFETT: The operating, yeah. Yeah. So -- business looks-- looks decent. It's not galloping ahead, and the tariffs having a little effect at 10%. If they went to 25% they would change things quite a bit. And I do see some more inflationary things. But, no, I don't see anything to be alarmed about at present. But incidentally--
BECKY QUICK: What inflationary signals --
WARREN BUFFETT: --if you told me GDP would be down this year we'd still be doing the same things, pretty much.
BECKY QUICK: What inflationary signs do you see at this point?
WARREN BUFFETT: Well, we just-- as I get the reports from the companies they say, 'These raw material costs are going up.' And, now oil being down helps us. I mean, that's the basis for a lot of raw material costs. But overall, there's more cost pressure.
BECKY QUICK: You mentioned that housing has been weaker. Home building, that you've seen that.
WARREN BUFFETT: Home building.
BECKY QUICK: Why do you think that is?
WARREN BUFFETT: It's puzzling because, you know, before 2008, you know, we were running higher-- well-- I mean, the one obvious answer-- you expect-- you expect household formations to go way down in a recession, and we had a bad one. But, you had this big trend-- from home ownership to renting so that, you know, that's probably changed by five percentage points. Well, five percentage points, when you talk about 125 million households, or six million houses are people that are living in rental units rather than houses. So that configuration has really changed. And I would've thought it would've turned back as people got the jobs back and all of that. But-- single family construction is really-- I think it's been quite weak compared to what you would expect after ten years of recovery and with the stock market, you know, quadrupling from the lows and unemployment at 3.7%. People are just making different choices.
BECKY QUICK: Jay Powell, the Chairman of the Federal Reserve, is set to testify before Congress on Tuesday and Wednesday of this week. Based on what you've said about the weakness in housing, based on some of the downturn that you saw, did you think he made the right move by signaling a much more dovish take last quarter?
WARREN BUFFETT: Yeah. I don't second-guess him at all. I think he's a terrific choice for Federal Reserve Chairman. He actually was at the Treasury in 1991 when Solomon was in trouble, and I saw him make a lotta very good decisions for the United States government. He is a smart man and he's-- he's very levelheaded, and he-- but he understands both business and economics, and I don't think you could have a better chairman. So-- I will never second-guess him.
BECKY QUICK: I know you don't make a lot of investing decisions based on what the Federal Reserve chief or anybody else is saying, but what would you be interested in hearing from him this week? What-- what might-- what might you be listening for?
WARREN BUFFETT: Well, I read what he says but it doesn't affect anything we do. It just doesn't. I mean, it doesn't affect it in investments or in, you know, the amount of money we're going to spend on the railroad this year, in energy or anything. We're plowing ahead always. We always spend more than our appreciation. And we know the country is going to make lots of progress over time and we don't think we're smart enough to jump in and out as to when the time is.
BECKY QUICK: A couple of questions that came in from viewers when it comes to the economy. One is-- T19 control room, Rashad Khan asking: "Do you think the ten-year yields are likely to rise from current levels in the long-run?" I don't know what the long-run is.
WARREN BUFFETT: Yeah. Well, I'm amazed that ten years into a recovery, or nine years into the recovery, ten years from the panic-- I'm amazed that rates worldwide are what they are. This is not classical economics to have trillions and trillions of dollars still at negative interest rates with the world doing really very, very well. I don't know-- you know, I don't understand it. I don't think the economists really understand it. I mean-- they got to explain it somehow. But the real question for stock investors are-- are these rates more or less a new normal? And people who thought the Japanese rates in 1990 couldn't possibly stay where they were, you know, that turned out to be suicide for the people that shorted Japanese bonds and so on. We live in a world that wasn't described in classical economics.
BECKY QUICK: Do you think it's because of the experimentation) by central banks around the globe?
WARREN BUFFETT: Well, I think the central banks did what they had to do after 2008 and 2009. In fact, I think Europe was a little late doing it. But when Draghi finally said, 'We'll do whatever it takes,' the only one that can say that is central banks. And I think central banks behaved very well post the recession.
BECKY QUICK: You've mentioned twice this morning how we could potentially be in a situation like Japan where these interest rates stay at these incredibly low levels. Will it work out better for us than it has for Japan?
WARREN BUFFETT: Well, the answer is I just don't know. But Japan also has a declining population and no energy resources. And, we're a different case than Japan.
BECKY QUICK: We're here at the Nebraska Furniture Mart today. And I know that you've talked a little bit before we came on the show this morning just about Rose Blumkin, who founded the Nebraska Furniture Mart. You bring up immigration so I thought maybe now would be a good time to talk about that. She came here from in 1917.
WARREN BUFFETT: Yeah. She came over here on a boat from Yokohama and she landed in Seattle. And I've got the manifest of the boat in here, and I've got her entry papers. And she-- and-- she couldn't speak a word of English. The Red Cross got her to Fort Dodge, Iowa, where her husband was. She spent two years there, couldn't pick up the language there. So they decided to come to Omaha where there were some Russian Jews and they would feel at least they had-- a home of sorts. And she sold used clothing and did various things, had four children. And 15 or so years later she'd saved $2,500, and you're in what was-- became the largest home furnishing store in the country, except we now have a larger one in Texas. But in the 50-somethingth largest market she took $2,500 and turned it into the largest home furnishing store. And the punchline is that she couldn't read or write. And I've got a contract here that we signed. This is what I came out with. I typed this up in 1983, August 30--
BECKY QUICK: Is that two pages?
WARREN BUFFETT: Yeah, it's-- it's really just one page. I mean, this is a signature page here. And that's her signature at the top, and as you can see it's just a scrawl. And we did not get an audit, we did not look at the property records to see-- I just said, "Mrs. B, do you owe any money?" And she says, "No." And that was it. You know, and we--
BECKY QUICK: How much did you pay?
WARREN BUFFETT: Well, at that time we bought-- we rearranged things within the family some. So we in effect bought 80% at a value of $60 million-- on 100% basis. But we had-- but we just-- we shook hands and-- I felt like I had the Bank of England on the other side. And then she went on to work until she was 103. If any of my managers are out there listening that's sort of a yardstick we use now on retirement. And was a marvelous, marvelous woman. And when-- never went to school a day in her life. And when the family sat down for dinner they sang God Bless America before eating. Yeah. It-- you know, it's an incredible story.
BECKY QUICK: Warren, in the annual letter this year you write about the American tailwind. What--
WARREN BUFFETT: Well, as I pointed out in there, I-- on this March 11 in a couple weeks it'll be 77 years since I bought my first stock, and I paid $114.75 for three shares of Cities Service Preferred. But if you had bought-- if you'd been a pension fund and you put $1 million into the S&P 500 at that time and reinvested it during my investing lifetime, that-- that $1 million would've turned into $5.3 billion. You would've gotten-- for every dollar you put in you've gotten over $5,000 without ever reading a headline, an annual report. You didn't have to know accounting, you just had to believe in America. And you didn't have to pick the right stock, you just picked America. And if that isn't a tailwind-- it's more like a hurricane. I mean, it is-- American business has done incredibly well, and America's done incredibly well. And-- you know, I go back and I point out that there were two 77-year periods before that, and that takes us back to George Washington getting inaugurated. And there wasn't anything here then. And now you have $108 trillion of household wealth in the United States. You know, we've got something that works, and that framework-- wasn't that we were working harder, wasn't that we were smarter, but we had a framework that unleashed human potential. And just think of that, three 77-year periods, one of which I experienced. And you couldn't help but-- all you had to do was believe in America and-- you got very, very-- we didn't have to read the newspapers-- nothing. You didn't have to pick a stock.
BECKY QUICK: That worked the last 77 years, but there's a question that came in, T29. This is from Scott Baker. "With so many people in the S&P index funds is it still market neutral and the best investment vehicle for most people?"
WARREN BUFFETT: Yeah, I think it's the best investment-- because most people don't know how to pick stocks. And-- most of the time I don't know how to pick stocks. I mean, it's-- it is not an easy game. And by definition people are going to do average. I mean, if you take everybody in aggregate, and if half of 'em are paying big fees and jumping around and paying brokerage commissions, the other half have to do better. And-- no, it is-- as I've told people in-- and my widow will I've instructed-- the trustee to put 90% in an S&P 500 index fund and 10% in governments, just so that-- just for a feeling of security. But-- there's been no better bet than America. There's been nothing like it.
BECKY QUICK: There's one question that came in from-- this is F20, Ahmad Abu Rasheed, who said, "Would a strong and sustained shift to the left in fiscal and economic policy rip away at American business tailwinds moving forward?"
WARREN BUFFETT: Yeah, well, my dad thought, you know, communism was coming in the '30s and, you know, he was very anti Roosevelt. All my life I've been hearing half the country say that the other-- the person favored by the other half wins, things are gonna go to hell. And so I pointed out in my dis