Even Buffett Isn't Perfect

"The idea of financial panic -- that has been pretty much taken care of,"
- Warren Buffett

“Economy May Face Prolonged Pain, History Suggests.”
-Greg Ip, Wall Street Journal

Mr. Buffett may be technically correct but that won’t help investors who come to the mistaken conclusion that further economic pain has been averted.

The argument being made in my previous reports and on the blog point to a painful adjustment process that the U.S. and world economy will likely undergo as it suffers through the withdrawal pains of deleveraging. Yes, the panic may be over (for now), but the adjustment is not.

A changed credit creation process will impact the real economy overall (through lower credit availability) but will also hit the Financial sector directly through a changed business model. The originate to distribute model is broken and whatever will replace will very likely not be anywhere near as lucrative as was witnessed over the past decade.

Investment Strategy Implications

The recent return to risk (I say complacency) by many market participants ignores the longer term shifts underway in the U.S. economy. Moreover, in the near future there is a rising likelihood that the U.S. consumer, particularly the baby boomers, will come to realization that their dependence on a rising net worth to provide for a retirement lifestyle that equates to something close to their current lifestyle (replete with high degrees of indebtedness) is no longer valid. Accordingly, a shift away from shop ‘til I drop to saving for that inevitable rainy day will contribute to the transformation of the U.S. economy.

Offsetting the downward economic pressure from a higher saving rate by the U.S. consumer will be an expanded U.S. export market. Global growth, if managed properly by emerging economies (not a guarantee by a long shot), can enable the world economy to navigate through the deleveraging process of the financial industry and a shift to savings by the U.S. consumer.

These factors are what await investors. And they should not be underestimated. Whether another credit crisis shoe will drop will only exacerbate the situation.

The situation is highly fluid. Therefore, the assumptions that the markets and economy are out of the woods seems premature, at best.

As the book title of my recent "Beyond the Sound Bite" guest, Vahan Janjigian, puts it – “Even Buffett Isn’t Perfect.”

Comments

[CloroxCowboy]

What if the majority of boomers do not realize that they are unprepared for retirement until it's too late? Much more frightening outcome in my opinion...

[icandoitdon]

i'm not so sure that the great expansion in credit is finished insofar as the consumer is concerned. at one time 3 year car loans were the standard. then it became 5 years....tomorrow it's ten years.

home mortages for 20 years was the standard when i was a kid. then it became 30. tomorrow it's 50. your kid will co-sign the loan.



americans have never been savers and never will be.

[steve west]

If only you read Mr. Buffets recent comments before posting.
you would see that he said at the recent BH meeting that we are in for a prolonged period of pain- However he WAS wrong- and so are you

[kurt walter]

GDP was up .60 percent last quarter. No recession. I know the media has been trying to talk down the economy to get a democrat in the white house. It worked in 1992. Second, I thought Buffett always said he doesn't try to forecast the economy. He only looks for businesses with good value and a wide moat. .. What gives, Warren? I do think Warren is overexposed. I can't seem to live a day without hearing his name mentioned. Now he is on a soap opera? He has a lot of money, okay, great. But, it would be nice for him to disappear for awhile. Enough.

[icandoitdon]

hahaha....i'm with kurt walter on this. it's time to retire, warren. make soap operas your new career...

i'm glad mr. west has set mr.buttet and us mortals straight on the direction of the economy.....