Warren Buffett on The Economy

[Jack]

-Although the Federal Reserve and others are suggesting that the downtrodden US economy will begin recovering in mid-2009, investment sage Warren Buffett says it will take longer, and unemployment will continue to rise for some time.-Buffett, who is chairman of Berkshire Hathaway predicted Friday that unemployment next year will go "considerably higher" than the 5.9% to 6.5% the Federal Reserve has suggested it will be by mid-2009.

-Goldman Sachs Friday lowered its US growth forecast, citing a fiscal policy stagnation, a record increase in unemployment and a sharp decline in profits, deepening and extending the expected recession.

-Goldman said it now expects US GDP to fall 5% in the current quarter, with unemployment rate reaching 9% in the fourth quarter of 2009. "The combination of weaker real activity and slower inflation means that profits of US companies will fall even more sharply than we had previously expected," Goldman said in a note to clients. Goldman now expects economic profits to fall 25% in 2009 on an annual average basis, the biggest drop since 1938.

-Goldman expects unemployment rates to rise further in 2010 as well, as there is little chance of the economy returning to trend growth by that year.

(Dow Jones 081121)

 

[EdRenkema]

QUOTE (Jack @ Nov 24 2008, 01:51 PM) -Although the Federal Reserve and others are suggesting that the downtrodden US economy will begin recovering in mid-2009, investment sage Warren Buffett says it will take longer, and unemployment will continue to rise for some time.



Indeed it may, read this peice from Greg Habstritt`s blog and take the time to watch the video exerpts taking note of the dates. Peter Schiff makes some bold (but accurate) predictions while others literally laugh at him, I guarantee they`re not laughing now.

http://www.greghabstritt.com/2008/11/23/th...es-of-zimbabwe/

 

[ZanderRobertson]

buffett`s been saying this for some time. he`s not called the oracle of omaha for no reason, we`d be wise to heed his advice, which right now is... BUY!!QUOTE (Jack @ Nov 24 2008, 12:51 PM) -Although the Federal Reserve and others are suggesting that the downtrodden US economy will begin recovering in mid-2009, investment sage Warren Buffett says it will take longer, and unemployment will continue to rise for some time.

-Buffett, who is chairman of Berkshire Hathaway predicted Friday that unemployment next year will go "considerably higher" than the 5.9% to 6.5% the Federal Reserve has suggested it will be by mid-2009.

-Goldman Sachs Friday lowered its US growth forecast, citing a fiscal policy stagnation, a record increase in unemployment and a sharp decline in profits, deepening and extending the expected recession.

-Goldman said it now expects US GDP to fall 5% in the current quarter, with unemployment rate reaching 9% in the fourth quarter of 2009. "The combination of weaker real activity and slower inflation means that profits of US companies will fall even more sharply than we had previously expected," Goldman said in a note to clients. Goldman now expects economic profits to fall 25% in 2009 on an annual average basis, the biggest drop since 1938.

-Goldman expects unemployment rates to rise further in 2010 as well, as there is little chance of the economy returning to trend growth by that year.

(Dow Jones 081121)

 

[rforgiel]

I watched Warren Buffet on Charlie Rose 3-4 weeks ago when the government was backstopping AIG and the other institutions. He was saying these things about unemployment but overall was positive over the long term for the American economy and agreeing with supporting the financial institutions. His take was, these are not bailouts but investments as the government was taking equity positions, which one day will pay off handsomly for the American tax payer.

Regards,
Ramon Forgiel

 

[wealthyboomer]

QUOTE (ZanderRobertson @ Nov 24 2008, 05:45 PM) buffett`s been saying this for some time. he`s not called the oracle of omaha for no reason, we`d be wise to heed his advice, which right now is... BUY!!
Economic conditions are so bad that they even blindsided the Oracle.
Berkshire Hathaway is genuinely threatened by a potential run on its credit, due to contractual provisions in its derivatives agreements that could compel it to post more collateral at exactly the worst time.Such collateral calls could be extremely harmful to Berkshire`s business model -- and that`s before taking into account the loss of business at its new monoline subsidiary.

At least day trading on Berkshire stock has been good lately.

I still enjoy Buffett and his economics.

 

[ZanderRobertson]

interesting, i knew that they had a stake in derivatives with one of their acquisitions, general re I believe. but I`ve read taht they have spent years previous to this credit crisis "unwinding" their derivatives, as buffett put it.

with what other holdings do they have a substantial derivatives stake?

this kind of high finance is dizzying to me. mind explaining in brief what this is all about and how it relates to berkshire?

QUOTE (wealthyboomer @ Nov 24 2008, 06:29 PM) Economic conditions are so bad that they even blindsided the Oracle.
Berkshire Hathaway is genuinely threatened by a potential run on its credit, due to contractual provisions in its derivatives agreements that could compel it to post more collateral at exactly the worst time.Such collateral calls could be extremely harmful to Berkshire`s business model -- and that`s before taking into account the loss of business at its new monoline subsidiary.

At least day trading on Berkshire stock has been good lately.

I still enjoy Buffett and his economics.

 

[Thomas Beyer]

QUOTE (ZanderRobertson @ Nov 24 2008, 06:38 PM) with what other holdings do they have a substantial derivatives stake?
Warren Buffet sold OEX (S&P 100) put options for about $5B cash .. which will expire worthlessly if the OEX is above certain values starting in 10 years .. but could be a liability if below ..

SELLING (index or stock) options, btw, as opposed to buying, is like owning the casino in Las Vegas .. you make money most of the time ... as most options (90%+) expiry worthlessly .. i.e. you sell to speculators / gamblers !!

look into it: selling them uncovered (like Warren Buffet, or naked, through his holdings) or covered !

 

[ZanderRobertson]

i see, but $5B doesn`t seem like it would be too much of a threat to berkshire.

according to the articles i read, he`s gone very long term on a couple of stocks, maybe he`s trying to throw a monkey wrench into his successors planning!!

or maybe he`s safely believes the market will go up over the coming 15 - 20 years.

wealthyboomer, how does this put him in a threatened position? or are there a whole lot more "put" options on the table than I could find?

interesting...


QUOTE (thomasbeyer2000 @ Nov 24 2008, 08:09 PM) Warren Buffet sold OEX (S&P 100) put options for about $5B cash .. which will expire worthlessly if the OEX is above certain values starting in 10 years .. but could be a liability if below ..

SELLING (index or stock) options, btw, as opposed to buying, is like owning the casino in Las Vegas .. you make money most of the time ... as most options (90%+) expiry worthlessly .. i.e. you sell to speculators / gamblers !!

look into it: selling them uncovered (like Warren Buffet, or naked, through his holdings) or covered !

 

[Jack]

QUOTE SELLING (index or stock) options, btw, as opposed to buying, is like owning the casino in Las Vegas .. you make money most of the time ... as most options (90%+) expiry worthlessly .. i.e. you sell to speculators / gamblers !!
90%+?!? No way. Maybe writers of puts have been successful 90% of the time since September of 2008, but there`s no way that can be a historical figure. How about the guys who bought 90-day oil futures in April that expired in July? They made boatloads.

Each individual in options trading is a speculator/gambler; one is betting on an index/commodity/individual stock to go up, one is betting on it to go the other way. Whoever wins, usually wins pretty big, especially if you`re non-hedged. It`s a risky, risky game for both parties! But it`s a lot of fun!

 

[Thomas Beyer]

QUOTE (ZanderRobertson @ Nov 24 2008, 09:04 PM) i see, but $5B doesn`t seem like it would be too much of a threat to berkshire.
$5B is the cash he COLLECTED when he sold the options .. the liabilities might be much higher if the S&P 100 goes well below his strike price in 10+ years .. which is unlikely as the S&P 100 on average goes up about 7%/year .. but of course is possible !

 

[Thomas Beyer]

QUOTE (Jack @ Nov 24 2008, 09:21 PM) ...
Each individual in options trading is a speculator/gambler ..

Actually NO .. it is about (known !!) probabilities !

What I do know is that in 30 days it is December 24 .. i.e. 30 days later .. and I do know that as such the time premium in all options will be 0 in a December call or put .. or lower in a 2009 call or put .. so I am NOT gambling .. I am "investing" ... i.e. I sell insurance on stocks which is a relatively predictable business "on average" .. of course you might lose once in a while .. but not on average !

Is an insurance company gambling ? No ! They do know that on average a 90 year old guy has less years of life left than an average 20 year old guy .. and as such set life insurance premiums accordingly .. or they know that a smoker on average lives less than a healthy person .. etc. ... of course it could happen that the odd 20 year old has a heart attack one year from now .. but if you insure 10,000 20 year old guys .. in 20 years more of them will be alive than 10,000 90 year old guys !

My prediction for you, Jack: in 10 years you will be either dead or 10 years older ! So the only question is how probable is it that you will be dead ? So, I take 10,000 Jack`s and "bet" / "gamble" on their age in 10 years ! Pretty safe bet !!

 

[ZanderRobertson]

the articles i was able to find on this said he is liable for about $4.7B. it also said they were for 15-20 years

do you mind linking any articles about larger positions he has? i find this very interesting.

QUOTE (thomasbeyer2000 @ Nov 24 2008, 10:23 PM) $5B is the cash he COLLECTED when he sold the options .. the liabilities might be much higher if the S&P 100 goes well below his strike price in 10+ years .. which is unlikely as the S&P 100 on average goes up about 7%/year .. but of course is possible !

 

[Jack]

QUOTE Actually NO .. it is about (known !!) probabilities !

Known probabilities? This isn`t poker!

How is buying a futures contract on the WTI price based on a known probability? You`re betting that the price will go up over and above the agreed-upon strike price at some point during the agreed-upon holding period. If it doesn`t, you lose your option premium. But unless you`re Miss Cleo, how is the future value of the WTI price a known probability? If it was, no option market would exist. Risk is determined by premium and time period, not probability. The probability that the option would be in the money might be lower if the time period is shorter (or it might not, given today`s crazy volatility), but the trade itself can`t be based on known probabilities. One person`s perspective on the probability of the WTI price going up might be much different than another`s; ergo, we have the industry that is options trading!

Put another way, say I want to short 1,000 shares of Suncor. How is its price falling based on known probabilities?

 

[ZanderRobertson]

Here`s one i found that indicates the size of the liability.

"Put Options

And as of March, he had tens of billions of dollars riding on two kinds of derivatives -- instruments he dubbed ``financial weapons of mass destruction`` in his 2002 letter to shareholders. The first is a variety of credit-default swap guaranteeing payment on certain high-yield bonds. Credit-default swaps, which are contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.

Buffett also has sold put options -- contracts that provide the right, but not the obligation, to sell a security, currency or commodity at a set price within a set period -- on four stock indexes. In his 2007 shareholder letter, Buffett wrote that because Berkshire holds the cash connected to the derivatives, there is no risk the parties on the other side of the transaction won`t pay."

entire article: $5B is the cash he COLLECTED when he sold the options .. the liabilities might be much higher if the S&P 100 goes well below his strike price in 10+ years .. which is unlikely as the S&P 100 on average goes up about 7%/year .. but of course is possible !