On reading Warren Buffett's much-anticipated letter to Berkshire Hathaway's shareholders, one can't avoid being struck by his faith in the ability of the American people to overcome adversity and to move the nation forward. This is a legacy that stretches from the Revolution to Lewis and Clark on to GI Joe. Despite Buffett's grave concern about the state of the economy now and in the immediate future one of the most striking passages in his letter is "America's best days lie ahead." The same sentence might have been written into the President's address to a joint session of Congress last week.
But, after that intersection of praising the American spirit, Obama and Buffett part ways violently when it comes to the economy. The investor's view is plainly stated: "We're certain, for example, that the economy will be in shambles throughout 2009 and, for that matter, probably well beyond but that conclusion does not tell us whether the stock market will rise or fall." He also believes that the government's intervention in the financial system, while necessary, will eventually cause a dangerous inflation. (See pictures from the Berkshire Hathaway Annual Shareholders' Meeting.)
The president's team of financial experts has predicted that the economy will grow by 3.2% next year, 4% in 2010, and 4.6% in 2012. It would be hard to find a well-regarded forecast which is that optimistic. The IMF has a much darker view of the pace of economic recovery. Even the organization that produces the Blue Chip Economic Indicators survey, known for only talking to the most optimistic experts, has estimated economic expansion far short of those used in the Budget.
The Administration's assumptions about the rate of the recovery were probably finalized several weeks ago. It would have been impossible to balance the Budget without them. At the point when those forecasts were set, GDP contraction for the fourth quarter of last year had not been revised to 6.2%. GM (GM) had not posted its huge loss. GE (GE) had not cut its dividend. And, Citigroup (C) had not been partially taken over by the government. Some analysts might say that those were unrelated activities made by large companies in unrelated industries. However, these firms were, until recently, the largest car company, bank, and industrial conglomerate in the world. How could the futures of each one disintegrate so rapidly in a matter of a few days?
The answer is that the catastrophic failures of the largest companies in three industries that are pillars of national commerce could not happen simultaneously if the financial world were not on the edge of disaster. It is impossible to underestimate the psychological damage that the failure of iconic institutions has on people who are already desperately afraid for their own futures. It is one thing to see a neighbor lose a home. It is another to see companies which have been at the heart of the American business world fall apart in a matter of months. The effect of watching titans fail is as traumatic to the average person as the loss of his own job. Another job will come along, at some point. Citigroup will never come back.
The easiest way to dismiss Buffett's assertions about the economy is to point out that his own performance in the market was the worst it has been in 44 years. This may be an indication that his skills as an investor do not extend to picking companies that will do well in a rough period. If other brilliant men in the investing world like George Soros, Wilbur Ross, and Julian Robertson did not see things essentially the same way, optimists could argue that there is no consensus among the great investors.
The Administration has a chance to hit the "reset" button before the Congressional debate over the Budget begins in earnest. The rosy forecasts presented with the document will be powerful leverage for those who want to discredit that entire package as the work of charlatans who want to make the results of their recovery plan look better than they possibly could be. Changing the basic assumptions behind the Budget means going through the entire document, program by program, and resetting the investments and returns on the investment for each one. The $1.75 trillion deficit would grow, or some programs would have to be cut. The scope of the national health care reform plan would have to be revised.
The unsustainable fiction about the rate of economic growth stands between the validity of the entire program to right the American economy. And, the authors of this grand plan are not likely to change it no matter how much evidence is available to disprove it. The creators of this budget seem to believe that the American citizen is incapable of understanding that the financial prospects of the next year have worsened considerably since the budget was formulated.
Douglas A. McIntyre
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