Warren Buffet on trade, US crash and residential housing market bubble

[Robert Oak]

The trade deficit and the value of the dollar

Buffett: "That really is the $64,000 question. It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these....

http://money.cnn.com/2005/05/01/news/fortune500/buffett_talks/index.htm?cnn=yes

Now who thinks he's getting trash akin to Martha Stewart and also
because he became an economic adviser to the Kerry campaign..
plus saying the emperor has not clothes. I know it's hard to trust
any billionaire but lately he seems to be one of the few speaking the truth.

[autorank]

1. Excellent post. He has a lot of credibility, so much so that sometimes

I'll bet he creates reality for some. Buffet can be the interim President after * is "resigned." Sort of like a city manager in a weak mayor city.

I'd be interested in what former Clinton Treasury Scty. Rubin thinks. I think he was the very best Treasury Secretary since Alexander Hamilton! and that he's a total genius.

[funflower]

2. It's completely stupid and bigoted

not to trust someone solely because he is rich.

[fasttense]

10. Why? Do you trust someone when they are wearing worn and tattered

clothes and eating out of trash can? It's just the opposite side of they same spectrum.

[funflower]

12. That is equally irrational

Street people are not innherently untrustworthy. One of my relatives became an addict and chose to live on the streets for a number of years. He was a nice guy and I did trust him (just not to reliably show up for holidays!).

Just think when we're trashing Buffet and Gates solely for being rich, we ought to remember that some folks with names like Kennedy, Heinz and Kerry are also rich.

[Trillo]

3. Buffet: "But when you get prices increasing faster than than the

underlying costs, sometimes there can be pretty serious consequences" (with respect to the housing bubble)

Is that statement true?

Retail construction material costs have soared during the Bush years, as measured by prices I've seen at the hardware stores. Portland cement is easily twice as expensive as it was 1.5 years ago. Lumber is up more than double. Prior to the year 2000, I could buy a 4'x8' chipboard sheet (relatively thin) for less than $5.00. The last time I checked, the same board cost more than $13.00.

I guess what I'd like to know, is, what happens when the cost of building exceeds what the market will bring for completed structures? Do material prices fall?

[The Doctor.]

4. No, prices do not fall.

Businesses fail.
Lay off workers,
unemployment rises,
followed by an economic collapse.

"healthy forests" will not keep construction costs down no matter what the schills have to say.

[Trillo]

5. Another aspect to what he seems to be saying

about the real estate 'bubble' is the relatively high cost for high end homes (he called them 'modest', but that's a billionaire's perspective). Isn't CEO pay at all time highs?

And exactly what is "economic collapse"? Nobody can afford what is for sale? Simplistic market theory says prices then fall. But if a few can still buy at near any price? What then?

[salin]

13. Or - no one can afford what their mortgage

and their are no buyers to whom to sell off the asset. So what happens if there are massive defaults to banks, who can not turn around and recoup the money through sales? Remember that many of the biggest financial institutions, as we learned in the after math of Enron, have been in leveraged lending frenzies and carry a huge amount of corporate debt (due to fancy financing and book work ala the old arthur anderson... practices reportedly still continuing unabated).

I think the collapse comes as an aftermath.

[dcfirefighter]

14. I'm spit-balling here:

In a market crash, value is destroyed. However three things aren't real capital (machines, buildings, etc.), labor, and land (raw materials). Things can still be produced, and people can be employed.

Of course there needs to be demand for goods.

There's always demand for goods: food, shelter, clothing, clean water, heat, medicine, etc. No matter what the economy is doing.

The problem is that those who need those things don't have the money to pay for them.

In the absense of the real reforms I want (land & natural resource taxes to pay for government services including a basic income grant; and debt free U.S. Gov't created money) an alternative that might work, without involvement of the government are LETS, or voluntary mutual credit systems.

[punpirate]

6. Following simple Keynesian economics...

... they should fall, because part of the pricing structure is predicated on demand. Demand's been very high. As for wood products, part of this is due to selective trade barriers to Canadian softwood products. You can still walk across the border to Canada and buy that piece of pressboard for $4. Some of the cost increase for cement is due to the demand for fuel (cement is made in part from the ash of coal clinkers).

Right now, you won't see completed costs being less than the building costs--the bubble is still expanding. But, when that bubble bursts, there will be a contraction of building--the builder will see housing prices drop and simply will choose not to build in those conditions. Gradually, the materials prices will go down, or inflation will keep retail prices high enough that increased material costs don't matter. If demand drops severely because of other economic conditions combined with the housing bubble bursting, I would guess that deflation will set in, in much the same way as it has in Japan in the past few years, or as it did during the depression of the `30s.

Right now, suppliers can charge more than the market could ordinarily tolerate because demand is high. When demand goes away, say, due to a rise in interest rates, they can continue to try to sell at inflated prices and lose sales, or adjust pricing to match demand. But, I doubt you're going to see a return to the prices of five years ago unless the economy goes seriously haywire.

Cheers.

[oblivious]

7. Is he really saying anything interesting here?

He's got a 21 billion hedge bet against the dollar and he's bought over 13% of PetroChina (making 1 billion profit), yet in this article he says: "I'm not pessimistic about the US at all.... We have over 80 percent of our money tied to the dollar. It's not like we've left the country." Ahem.

OK, he implies that there is a housing bubble, but then he says "If indeed there is a bubble...", so he's not really saying anything. He hedges as much as any politician.

Also, he plays the administrations fear game, talking up the possibility of another terrorist strike.

[Robert Oak]

8. I took it as a "Greenspanism" in that

like Greenspan anything he says can affect the markets..

but I note your point on the contradictions.

Also note "tied to the dollar" does necessarily bet the dollar
will go up...he might be massively shorting the dollar in various
ways.

The housing bubble more he's implying it at least in certain
areas like CA by the 60M an acre comment.

[oblivious]

9. Yes, fair enough, it's impossible for him to say what he really thinks.

As you point out, a doomsday statement by him could be self-fulfilling prophecy. Hinting or implying is as far as he can go.

[dcfirefighter]

11. It's not a housing bubble, it's a land bubble

With every landowner, property owner, and homeowner clinging to his 1/4 acre, and opposing intensive urban development, land anywhere near centers of employment is scarce.

With prices still rising, each landowner is holding out for top dollar: when the lot down the street goes for $400,000, he holds out for $425,000.

It's happened time and time again in history: any gains in wages or productivity is taken by landowners raising their prices.

With artificially low interest rates, and predatory lending, just about everyone has access to a lot of money to buy a house - and those selling property are benefitting from it.

But when the wrinkle comes, and a few people can't make payments, and can't keep up with their mortgages, the bubble will collapse.

There is no legitimate claim to the ownership of land anyway, other than what society, through government, grants the owner. "I am mine", "I built this, it is mine", "I bought this from the guy who made it" are all valid statements. "This is mine because I got here first" isn't.

The concept of ownership of land isn't a natural one. There are economic and moral justifications for paying the rest of society for the privilege of occupying land that wasn't created by man. This would be in the form of paying a tax on the value of the land you claim.

Also, if we didn't outlaw industrial hemp, we could have cheap construction materials.