Buffett Says Pessimism on Economy and America Is ‘Dead Wrong’

By | February 28, 2016

Warren Buffett reaches a broad audience with his annual letters to Berkshire Hathaway Inc. shareholders — and, on Saturday, he reached right out to U.S. voters.

In sweeping passages, he rejected the economic pessimism dominating the 2016 U.S. presidential campaign as “dead wrong” and made a case for a bright future. A supporter of Democrat Hillary Clinton, the 85-year-old Berkshire chief executive officer didn’t name the candidates espousing a dark outlook. But his message put him at odds with most of the Republican field and Vermont Senator Bernie Sanders, who is challenging Clinton for their party’s nomination.

Buffett’s letters, which are revered for their investing wisdom and replete with folksy one-liners, often include passages directed at money mangers, bankers and other CEOs, in addition to Berkshire’s shareholders. Of late, he has been inserting himself more into politics, stumping for Clinton and speaking about the direction he wants the country to head.

“He’s countering the Donald Trump juggernaut,” said Steve Wallman, a money manager in Middleton, Wisconsin, who has invested in Berkshire since 1982, referring to the Republican front-runner. “This was his brief on behalf of Hillary. And I think he weighed in in hopes of influencing the discussion.”

The letter also highlighted the growth of Berkshire’s operating businesses, which contributed to a record $24.1 billion of net income last year. Buffett hailed the BNSF railroad unit for recovering from subpar results in 2014. And he praised the largest companies in his stock portfolio, including slumping International Business Machines Corp. and American Express Co. The billionaire also said there will be more takeovers, including from a manufacturing business he bought just weeks ago in one of his biggest deals.

Surpassing Dreams

But, most of all, Buffett projected his view about the “all-powerful trend” toward more productivity that has made America great and will continue to benefit Berkshire. Over the course of his lifetime, he wrote, the nation’s economic output has risen six-fold per capita, “a leap far beyond the wildest dreams of my parents or their contemporaries.”

Candidates who have been painting a picture of economic woe were doing so to win votes, not because it accurately reflects the nation’s challenges, he said.

“As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do,” Buffett wrote. “That view is dead wrong: The babies being born in America today are the luckiest crop in history.”

Led by Trump, a billionaire real-estate magnate, Republicans have delivered a relentless critique on the direction of the U.S. economy, which they say is being pummeled by an ascendant China and an inflow of immigrants from poor counties. Sanders, a self-described democratic socialist, has stirred up working-class and young voters with a focus on income inequality that he says has ravaged the middle class.

Voter Pessimism

Many voters appear to share those pessimistic views. Despite successive quarters of economic growth, employment and jobs topped the list of concerns among Democrats, while for Republicans, the economy tied with terrorism as the No. 1 worry, according to Gallup’s Jan. 21-25 election benchmark survey.

Even as America’s economy expands over the long haul, fights over the nation’s prosperity won’t abate, Buffett wrote. Gains in productivity have delivered huge benefits to society, but they’ve also left some workers behind — including at Berkshire-owned businesses.

“The answer in such disruptions is not the restraining or outlawing of actions that increase productivity,” Buffett said. “The solution, rather, is a variety of safety nets aimed a providing a decent life to those who are willing to work but find their specific talents judged of small value because of market forces.”

Buffett said he favored a “reformed and expanded” earned-income tax credit, a policy that allows many lower-income Americans to pay no net income tax.

‘All-In Wager’

Many Berkshire shareholders and executives — including Vice Chairman Charles Munger — hold more conservative political views, so it’s not surprising that Buffett didn’t name any specific candidates in the letter. Over the weekend, some investors said they shared his optimism about the U.S., but looked past the message it may have been sending to voters.

“I don’t agree with a lot of his politics, but that’s OK,” said David Rolfe, who oversees about $8 billion, including Berkshire shares, as chief investment officer of Wedgewood Partners Inc. “He’s got his platform, and he’s using it a little more.”

Buffett has long expressed his optimistic views about the country where he made his money. Few have benefited more than he has from U.S. economic prosperity. Over the past five decades, he amassed a $62 billion fortune building Berkshire into a sprawling conglomerate with interests in insurance, energy, manufacturing, media, retail and transportation.

Most of his businesses are based in the U.S. and the billionaire continues to make America his primary hunting ground for deals. When he agreed to buy BNSF in 2009 for $26.5 billion, he called it an “all-in wager” on the future of world’s largest economy. And, since then, he’s invested heavily in the operation to upgrade infrastructure and improve service.

Cutting Jobs

While Buffett’s preference over the years has been to own and operate companies that are already lean, he recently partnered with buyout firm 3G Capital on a few deals where the goal was to cut costs. The investment firm is known for firing workers at the businesses it controls and for boosting productivity.

In 2013, Berkshire teamed with 3G to buy ketchup giant H.J. Heinz, and swiftly eliminated thousands of jobs. Last year, Buffett and the investment firm engineered Heinz’s merger with Kraft Foods Group Inc., and the combined company is making additional cuts.

In the letter, Buffett defended 3G’s approach as part of the long march of capitalism, echoing an argument that he and Munger made at last year’s annual meeting in Omaha, Nebraska. The passage on productivity may have been meant to rebut shareholders who think Berkshire has veered off-course by working with 3G, said Tom Russo, who oversees about $11 billion including Berkshire shares at Gardner Russo & Gardner.

Buffett has long marketed Berkshire as the buyer of choice for families looking to find a permanent home for their businesses. The billionaire is adamant about holding on forever to companies he acquires, and has adopted a hands-off approach to management. The partnerships with 3G may have given some potential sellers pause, Russo said.

“Ultimately, he doesn’t want to be seen as an indirect corporate raider,” Russo said. “It would not add value to the Berkshire reputation.”

Insurance Results

[Berkshire Hathaway reported its thirteenth straight underwriting profit. Insurance operations for Berkshire Hathaway contributed $4.9 billion to total operating income of $17.4 billion for Berkshire Hathaway in 2015, with underwriting profit levels dropping and investment income rising compared to 2014.

The underwriting component, $1.2 billion (after taxes), represented the 13th straight insurance underwriting profit for the Nebraska-based conglomerate. But the amount was more than 30 percent lower than in 2014 as GEICO, General Re and Berkshire Hathaway Reinsurance all reported smaller margins of underwriting profit in 2015.

Only Berkshire’s primary operation posted a higher level of underwriting profit—$824 million (before taxes), nearly 32 percent higher than 2014—while profits for GEICO and the reinsurance operations dropped between 30 percent and 60 percent. Results for just the P/C insurance operations and the P/C operations of the reinsurance operations are set forth in the chart below.

For a complete report on Berkshire Hathaway insurance results for 2015, see Senior Editor Susanne Sclafane’s exclusive report on CarrierManagement.com.]

Warren Buffet’s Annual Letter:


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