Wednesday, April 24, 2019

Warren Buffett and Charlie Munger on post-crisis macroeconomics

As this year's Berkshire Hathaway Annual Meeting is approaching, I've been thinking about some of the comments Warren Buffett and Charlie Munger have made since 2009 about how the post-crisis government and central bank interventions in economies and markets will play out. Basically, my impression from attending all of the annual meetings since the crisis was that they believe that since a lot of this, including zero and negative interest rates, has never happened before, no one really knows how it will all play out (although plenty of commentators will tell you otherwise). 

As such, it's best to just continue to focus on the micro factors, and manage risk by investing in businesses likely to survive and hopefully thrive under a wide range of scenarios, including potentially high inflation at some point. After going back through things, it seems my impression was roughly correct. Below are some of their comments over the last several years that I think give a good summary.


"We are doing things that we haven’t seen in the past. And policymakers do not know the outcome of that. I don’t know the outcome of it. You do know it will have consequences." --Warren Buffett (2009)

"I do not know the answer as to what happens if you keep rates close to zero for a very, very long time." --Warren Buffett (2014)

"Nobody, for instance, in Japan would ever have anticipated that interest rates would go way down and stay down for 20 years. And nobody would’ve expected common stocks to decline by huge amounts and stay down for 20 years. So strange things have happened. And they’re very confusing to the economics profession. In fact, if you’re not confused, you really probably don’t understand it very well." --Charlie Munger (2014)

"We’ve taken the Federal Reserve balance sheet up from a trillion to over 4 trillion, and we’ve done a lot of things that weren’t in my Economics 101 course, and so far nothing bad has happened, except for the fact that people who saved and kept their money in short-term savings instruments have just totally gotten killed, in terms of the income that they received from that. But it’s still hard for me to see how if you toss money from helicopters that eventually you don’t have inflation. Certainly, if the money supplied grows faster and faster relative to the output of goods and services, something like that is supposed to happen. But I’ve been surprised by what’s happened. When Poland issues bonds at negative interest rates, you know, I did not have that in my list of forecasts a few years ago. And so I think we’re operating in a world that Charlie and I don’t understand very well." --Warren Buffett (2015)

"We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated. We’re just swimming all the time, and we let the tide take care of itself.... The trouble with making all these economic pronouncements is that people gradually get so they think they know something. It’s much better just to say, 'I'm ignorant.'" --Charlie Munger (2015)

"We’re interested in economic matters, and political matters, for that matter. We know a lot, or are familiar...with almost all the macroeconomic factors. That doesn’t mean we know where they’re going to lead. We don’t know where zero interest rates are going to lead." --Warren Buffett (2016)

"I don’t think anybody really knows much about negative interest rates. We never had them before. And we’ve never had periods of stasis like — except for the Great Depression — we didn’t have things like happened in Japan: great modern nation playing all the monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years. And none of the great economists who have studied this stuff, and taught it to our children, understand it, either. So we just do the best we can. Our advantage is that we know we don’t understand it. If you’re not confused, you haven’t thought about it correctly. " --Charlie Munger (2016)