Equity markets are not yet bargain-priced and there's more pain to come on Wall Street because of the debacle in U.S. mortgages, says Warren Buffett, the world's second-richest man.
“I was 370 points giddier yesterday at the end of the day than at the start of the day,” he said, referring to Tuesday's 2.9-per-cent decline in the Dow. But, he added, “I'm not giddy yet. Things are not ridiculously cheap.”
The iconic chairman of Berkshire Hathaway Inc. told an audience in Toronto that he'll support the Democratic candidate for U.S. president, no matter who wins the nomination – “I think they're both outstanding candidates” – and said it's “poetic justice” that some big-name U.S. banks are getting hurt by the complicated packages of debt securities they helped create and sell.
“The people who brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” Mr. Buffett said.
He also said he was not optimistic the housing bust would work its way quickly through the financial system.
“It's going to take a while, because there's all these secondary and tertiary effects. It isn't just subprime. When housing prices go down, it affects the prime stuff [too].”
The Standard & Poor's 500 index has dropped 9.7 per cent this year, while the Nasdaq ended Wednesday's session some 20.3 per cent below its October closing highs, signalling that a bull market run that had begun in October, 2002, is officially over.
Mr. Buffett, in the country to promote the Canadian launch of BusinessWire, which Berkshire Hathaway owns, addressed an audience of several hundred people for more than an hour during an informal question-and-answer session. He held forth on topics as diverse as philanthropy, dual-class shares and index funds, which he said are the best choice for anyone who doesn't have the inclination or skill to study individual companies.
While he conceded the problems in the credit markets, particularly in the U.S., have “rippled across the globe,” he said he didn't consider it a credit crunch, but a repricing of risk. For creditworthy borrowers, “money is available and it's really quite cheap.”
On the U.S. dollar, he suggested there was no reason it wouldn't continue to fall over “the next five to 10 years” unless the U.S. government changed policies that have led to a massive trade deficit.
“Force-feeding a couple of billion a day to the rest of the world is inconsistent with a stable dollar.” It's only natural, he said, that sovereign wealth funds from the Middle East and Asia that have funded that deficit would spend some of their U.S. currency reserves on large equity stakes in U.S. banks like Citigroup.
“The truth is we're selling America to the rest of the world. It's just a question of what form we sell it to them. They're going to invest their money if we send them $2-billion a day. I don't blame them at all for investing the money that we're forcing them to invest.”
The only currency bet Berkshire Hathaway has at the moment is in the Brazilian real, he said.
On the response to recession fears, he noted that it's hard for the U.S. Federal Reserve to fight inflation and deal with slowing growth at the same time. “I wouldn't be at all surprised to see [inflation] become more of a factor.”
© The Globe and Mail
