Buffett's "Soft Landing" Quotation: A Prediction

Warren Buffett's annual letter to the shareholders of Berkshire Hathaway is widely read both for its wide-ranging wisdom and as a source of new ideas. The 2006 edition, released last week, is already attracting attention and media commentary.

Since most investors are not going to read the entire letter themselves (although they should), they will rely on media reports to learn Mr. Buffett's thoughts. We predict that one aspect of the letter will be cited in a way that seriously misleads investors, the statement in which he uses the term "soft landing."

Look first at the relevant paragraph in the letter, a section where Mr. Buffett is discussing U.S. trade deficits and debt problems:

I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.

As usual, Mr. Buffett's point is strongly stated and clearly put. Trade and budget deficits are decades-old problems, and, as the statement suggests, may take decades to resolve. Unless our policy direction is changed, there will be an unpleasant ending. This is an issue that requires the use of the ballot box, particularly by young people.

Now consider the lead from a Reuters story on the letter:

Warren Buffett said on Thursday the U.S. economy may not enjoy a "soft landing" because Americans are taking on too much debt as the U.S. trade deficit worsens.

Because of the multi-year debate about the Fed tightening cycle, the "soft landing" phrase probably brings that association to mind for nearly all investors and most other readers as well. While most people are worried about what stocks will do next year -- or even next week -- that is certainly not the topic of Mr. Buffett's comment.

He is also not commenting on the Fed or the economy or current economic prospects. Consulting my autographed copy of the wonderful book of his quotations, I find (p. 97) the following:

We spend essentially no time thinking about macroeconomic factors. In other words, if someone handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay attention to it.

The Reuters story provides the entire quotation for someone who reads it carefully, and the article is not technically incorrect. It is however, very misleading. The all-important lead sentence will be interpreted by many as a short-term prediction about the success of current Fed policy. It is nothing of the sort.

Our prediction is that there will be more egregious stories, far worse than the Reuters example. During the next few days you will hear statements like "Buffett says there will be no soft landing." These will be tossed around as fact -- the accepted conventional wisdom.

It is very similar to the manner in which Alan Greenspan's recent general comments about business cycles morphed into a forecast of imminent recession.

Most people do not do complete and careful reading. The media summaries are both very important and potentially dangerous.