Bloomberg’s David Westin spoke with Berkshire Hathaway Chairman Warren Buffett on his 87th birthday before his charity auction lunch at Smith & Wollensky’s in New York.
Among the topics discussed was the Fed's upcoming balance sheet normalization: Buffett told Westin that the Federal Reserve will be “very careful” with how they handle quantitative easing as the Fed may have to find buyers for "trillions" in assets. Predictably, Buffett argued in support of QE which added tens of billions to his net worth: “[QE] did wonders for us coming out of 2008. Without it we would have gone back to the economics of 100 years ago. If the Fed had not been there to ease, we would have had a far different recovery. I think the Fed has overwhelmingly done the right thing. Now, we’ve never gone through a period like this and how it will all work out, we will find out. I think they will be intelligent about it but they’ve never played this game yet either.”
Separately, Buffett said the relentless, artificial, central bank-induced rally over the last several years has made it "harder to find bargains", but that stocks "remain his choice over bonds." Asked by Westin why cash has been piling up at Berkshire, Buffett said “it tells us stocks aren’t as cheap as they’ve been most of the time.” Buying shares after the 2008 financial crisis, Buffett said, was like “shooting fish in a barrel”, although he forgot to add that the US government bailing out his core financial holdings, did not hurt either.
In any case, in recent year, Berkshire's stock portfolio, which includes multibillion-dollar stakes in companies like Apple, the scandal-plagued Wells Fargo and Coca Cola, was valued more than $135 billion at the end of June, almost the same size as the AUM of the world's largest hedge fund, Bridgewater.
Stocks “have gotten less attractive as they’ve gone along,” Buffett said. “They’re still very attractive compared to bonds.”
Buffett has plowed money into stocks this year, including Apple. But finding new acquisitions has been a challenge lately. Earlier this month, his bid to take control of Oncor Electric Delivery Co., Texas’s largest power distributor, fell apart. That failed effort came six months after a Berkshire-backed deal to buy Unilever hit the skids.
The collapse of two high-profile pursuits in such a short time frame is a rarity for Buffett, who did his last major deal in 2015 when Berkshire agreed to buy aerospace-parts manufacturer Precision Castparts Corp. for more than $35 billion. While he’s made many offers that went nowhere, it’s less common for such misses to play out in public.
According to Bloomberg, the recent deal drought has bigger implications for Berkshire. The company doesn’t pay a dividend and rarely buys back its own stock, so failing to consummate a few major transactions means cash piles up from its subsidiaries. At the end of June, Berkshire had just shy of $100 billion.
Finally, in a discussion of assorted items, Buffett said that the US economy does not feel like a 3% GDP, that anger in the US stems from wealth inequality and when asked what's the one thing that Buffett generally feared, the answer was "if we're talking broadly, the answer is weapons of mass destruction."
"Now you've got weapons that can kill millions and millions and millions of people, and you've got them in unstable hands in certain cases. We live in a dangerous world that way, it's the only real problem for humankind."
Buffett then said that in this context, North Korea is at the top of his list: "if you have a small, relatively poor country that's spending a significant part of its GDP trying to figure out how to get an ICBM to hit the west coast of the US, there's something going on in somebody's mind that I don't like."
Finally, the reason why Buffett was in the New York Smith & Wollensky today is to dine with the winner of an annual charity auction that raises money for Glide, a San Francisco non-profit. The top bidder, who chose to remain anonymous this year, paid $2.68 million to bring as many as seven friends to lunch with the billionaire at Smith & Wollensky steakhouse. With insights such as these, we think the many could have been spent with a much higher IRR elsewhere.