What Buffett Has Forgotten, But We Should Remember
By Staff News & Analysis - May 08, 2013

Buffett says economy on mend, bonds 'terrible' investment … Warren Buffett said the U.S. economy is gradually improving, but low interest rates have made bonds "terrible investments" while stocks remain "reasonably priced." Speaking on CNBC television on Monday, the chairman and chief executive of Berkshire Hathaway Inc. said the economy is benefiting from an upturn in areas that had not previously performed well … Buffett spoke on CNBC after Berkshire's annual shareholders meeting over the weekend in Omaha, Nebraska. The world's fourth-richest person said low benchmark interest rates, including overnight rates that Federal Reserve Chairman Ben Bernanke has kept at effectively zero since late 2008, can help stimulate demand. – Reuters

Dominant Social Theme: Okay, we had a rough patch, but things are looking up.

Free-Market Analysis: This article makes sure to remind us that Warren Buffett is the world's fourth richest man. But wealth does not necessarily create wisdom.

We remember when Buffett was technically broke … certainly right after the financial crisis that began in 2008. Then with almost every other Goliath, Buffet was busted. Briefly, his net worth was probably negative.

It was money printing that caused the financial crisis, in our view … money printing and low rates. Since then, there has been more of the same and gradually a reflating bubble. This is what Buffett and others are calling "a recovery."

It has been driven by central bank Super-Money. Apparently, the Federal Reserve in particular sent trillions around the world in so-called "short-term" loans that have never been repaid. Supposedly, Ben Bernanke provided some US$16 trillion in liquidity in a single weekend.

So it is worth remembering, when listening to someone like Buffett – as wise as he is – that only a few years ago he was basically broke. If the system had shattered so would his wealth.

Here's more from the article:

Many investors have also been drawn to bonds because their prices rise as rates fall, and Buffett said they could get their comeuppance when that process reverses.

"Bonds, they're terrible investments now," Buffett said. "That will change at some point, and when it changes, people could lose a lot of money if they're in long-term bonds."

He said stocks, in contrast, are "reasonably priced," though he continues to shy away from sectors such as media, where he cannot reasonably predict who will thrive in the long run.

"It's a lot easier for me to predict that ketchup will be doing well or Coca-Cola will be doing well in 10 years," Buffett said, referring to Berkshire's pending takeover with Brazilian investment firm 3G Capital of H.J. Heinz Co (HNZ.N), and Berkshire's large investment in Coca-Cola Co (KO.N) stock.

… Speaking on Monday, Buffett called Bernanke "a gutsy guy" who has "done very, very well in terms of what he has done for the United States."

Last week, the Fed said it would continue to buy $85 billion of bonds per month to spur growth, and it will step up purchases if needed. The economy grew at a 2.5 percent annualized rate in the first quarter.

Buffett is probably right about bonds, just as he is often about stocks. But all his analysis is focused around interest rates and Ben Bernanke actions as regards money printing. He even calls Bernanke a "gutsy guy."

The "Sage of Omaha" is known as an investment guru but, unfortunately, in this latest financial crisis we have seen more clearly than ever that nothing much else matters to the economy than the ability to print money and lots of it.

When Buffet says the stock market is reasonably priced, we have to wonder exactly what he means. Is he speaking of value or of Fed pump priming?

This is our larger point as well when it comes to investing. One needs to watch central bankers and the dominant social themes they promote just as much as one watches the market itself.

And it is a melancholy fact that if one had merely restricted one's investments to the military-industrial complex and Intel adjuncts such as Google and Facebook, one probably would have beaten the market hands down.

Investments these days are subject to a great struggle between manipulation and free-market pushback. What you invest in depends on what you believe the outcome of this struggle will be and the timeline as well.

Buffett, in our view, does consumers no favor by not spelling out larger market and governmental forces at play in the marketplace. By focusing on value, he is leading investors into believing that mathematical analyses and historical performance are the main drivers of investing.

After Thoughts

But let us remember the financial crisis of 2008 when even Buffet found out otherwise.