Billionaire investor Warren Buffett said on Monday the US economy is in recession and “stocks are not cheap.”
Speaking on CNBC television, Buffett also said he is no longer offering to guarantee $800 billion of municipal bonds backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp, three large bond insurers. Buffett said that “from a common-sense standpoint right now, we’re in a recession,” though the US economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession. He said the environment is “nothing like ‘73 or ‘74 yet,” referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks. Still, he said investors should not rule out a significant economic downturn, and that Federal Reserve Chairman Ben Bernanke has a “very tough balancing act” in trying to boost economic growth without kindling inflation. Buffett said there is a fair chance that inflation may ignite in a “serious way.”
On Friday, Buffett’s insurance and investment company Berkshire Hathaway Inc reported an 18% decline in Q4 profit. This stemmed in part from weakness in businesses linked to housing, including units that make bricks and carpet, and that offer real estate brokerage services. Buffett said he is finding more buying opportunities in stocks following a 16% decline in the Standard & Poor’s 500 stock index from its recent high in October. “I find more things to look at now than I did six months or a year ago,” Buffett said. But he acknowledged that conditions have changed “more dramatically” in the bond market. Berkshire last year spent $19.11 billion on stocks and $13.39 billion on bonds. Falling security values and liquidity have pummeled bond insurers, which normally insure relatively safe municipal bonds, but also guaranteed billions of dollars of riskier debt, often tied to subprime mortgages.
On Feb. 12, Buffett offered to reinsure $800 billion of municipal bonds, but only at a steep premium. The offer did not include the riskier debt. Bond insurers rejected the offer and have been seeking new sources of capital or possibly breaking themselves up. Buffett on Monday said his earlier offer was “not on the table.” In December, he started his own bond insurer, Berkshire Hathaway Assurance Corp. Since 1965, Buffett has transformed Berkshire Hathaway Inc into a $216 billion conglomerate by acquiring out-of-favor companies with strong earnings and management, and investing in stocks. Berkshire said it has 76 operating companies that sell, such things as insurance, ice cream, paint and underwear. Berkshire’s Class A shares closed Friday at $140,000. Through Friday, they had risen 32 percent in the last year. (Reuters)