Does Buffett Still Stand by His 1999 Sun Valley Prediction?

Readers of the new official Warren Buffett biography The Snowball will be taken aback by the review of his presentation to the Sun Valley meeting of the US super-rich in 1999. Then he suggested that the Dow might go nowhere for 17 years, following a pattern seen in many previous epochs, most recently 1964-1981.

Remember that 1999 represented the very height of the dot-com bubble. Buffett’s statement was bursting the bubble of business success stories like Bill Gates, who sat in the audience and gasped at this prediction.

Yet how wise the Sage of Omaha has proven to be. The dot-comers have seen their fortunes shrink and not recover from the bust. And the Dow today is substantially lower than in 2000.

Why buy now?

Why then did Warren Buffett put out a buy notice on stocks last month? Is this not a contradiction of his own prediction about 1999-2016?

Well, to be fair the Dow has rallied 20 per cent since his call. But is this therefore nothing more than a bear market rally?

If we are to take the seminal 1999 statement from Warren Buffett seriously, and he has not denied it and presumably endorsed its inclusion right at the front of his new biography, then that has to be the conclusion.

However, it could be that the inflation outlook has changed so dramatically in the wake of the $8 trillion in bailouts and stimulus packages now being thrown at the US economy that Buffett is having a re-think.

Stocks could well be buoyed upwards by a hyper-inflationary economy. This has happened most recently in Zimbabwe though this is hardly an economic model worth replicating in the world’s biggest economy.

Q-theory

Russell Napier, author of the definitive book ‘Anatomy of the Bear’ reckons stocks could rise for a couple of years on the back of the money being injected into the global economy, but this will ultimately fail and lead to stocks plunging to new lows.

According to Q-theory - which values stocks by reference to replacement value of their assets - the Dow market bottom is at around the 4,000 level or another 55 per cent down.

The ride from 4,000 back to 14,000 would be a very substantial roller-coaster ride, and that might indeed take until 2016 as Warren Buffett suggested in 1999.

But in the short term a two year bull market in an inflationary environment, and presumably with a weakening dollar, would be highly positive for precious metals, and particularly their stocks.

As suggested elsewhere on this blog the Dow-to-gold ratio could well go to its historic low of one: that is to say $4,000 an ounce for gold and the DJI at 4,000 within this two-year time horizon and maybe next year.

Comments

[GMiki1:]

Shocking, but it could be. When people first suggested a one to one gold to DOW, I thought `noooo.' Now I think it's possible. Of course it could be $6,000 to 6000.

2008 Dec 11 10:20 AM

[socrateazz:]

I think anything buffet says to day has to be concidered through the thought he already has great wealth invested today and may react based on trying to keep that wealth from declining further. I think the probabillity of another drop increases with each day. Especially if no strong raise is seen soon.

2008 Dec 11 10:44 AM

[NOWHEREMAN:]

or $10,000 to 10,000 as some gold bugs who want a return to the Gold Standard have suggested?

Q theory? is this the old K-Wave renamed?

Kondratiev, Grand Super Cycle.

2008 Dec 11 10:50 AM

[DougM:]

There's nothing contradictory here. In past secular bears (1930s, 1970s) they lasted about 17 years with a lot of zigs and zags in between, but in the end with no returns for someone who bought in at the beginning. However, the time to buy wasn't right at the end of the bear, but somewhere in the middle during one of the big legs down. You didn't have to get the best downdraft to do well, you just had to get a good enough drop. Or better yet, stagger your buys across them to hedge your bets.

2008 Dec 11 11:39 AM

[Roger Knights:]

If Buffett expects very high inflation, and is selling put options on that belief, then it wouldn't make sense for him to be "upfront" about his belief, because he is so influential that doing so would lower the price he'd get.

It makes sense--and Buffett is wily enough to see and think around corners. Good article.

2008 Dec 11 11:41 AM

[Not_A_Guru:]

The US Economy has always been one of bubbles . so what is all the gloom and doom about . Everytime the US faces a recession we here these perdictions since the 70s . 80s , 90s .etc .

2008 Dec 11 10:52 PM