At Berkshire Hathaway’s AGM last Saturday Warren Buffett offered a few thoughts on severity of the Covid-19 shock.
“It’s been a flip of the switch in a huge way in terms of national behaviour, the national psyche. It’s dramatic. There’s a wide variety of possibilities on the health side, and on the economic side.
Of course, they intersect, bouncing off each other. The range of possibilities on the economic side are extraordinarily wide. We do not know what happens when you voluntarily shutdown a substantial proportion of your society.
In 2008-9 our economic train went off the tracks. There were some reasons why – because of the banks and all that. This time we just pulled the train off the tracks and put it in a siding…unavoidably breeding a huge amount of anxiety and changing people’s psyche, causing them to somewhat lose their bearings in many cases.”
A V-shaped recovery?
I think Warren is probably in the extended U-shaped recovery camp - see what you think:
“I don’t know the consequences of shutting down the American economy. What we do know is that for some period – certainly during the balance of this year, but it could go on a considerable period of time, who knows – our operating earnings will be less, considerably less than if the virus hadn’t come along. It hurts some of our businesses a lot, it affects others much less.”
“We don’t know how long this period lasts. And nobody knows. Most people think the virus will, to some extent, decline in its spread during the summer months. I would think that it will come back at some later date. How the American public reacts if they get their hopes up through some reopening, and how they react to a second attack by the virus – it’s like Dr Fauci says, the virus is going to determine our behaviour.
You’re dealing with huge unknowns, and the degree to which it has disturbed the world’s habits and endangered businesses indicates you’ve got to be not too sure of yourself or what it’ll do in the next six months or year or whatever.”
Buffett gives special mention to Boeing and Airbus (not BH investments) who “don’t know what their future is…the real question is whether you need a lot of new planes or not. It’s a blow to have essentially your demand dry up”. As an example of the knock-on consequences: Boeing buys from BH’s Precision Castparts who are now badly affected.
“It won’t be any fun with the businesses where the world has really changed. You’re seeing a lot of change. If you own a shopping centre you’ve got a bunch of tenants who don’t want to pay you right now. The supply and demand for retail space may change… and for office space…significantly.”
Why haven’t you been buying shares or preferred stock?
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Prof. Glen Arnold
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