Warren Buffett: The Global Economy is Slowing, Stock Prices are “Difficult”

Warren Buffett was doing his regular (quarterly?) interview on CNBC this morning and made some interesting comments on the big picture outlook.  He said:

“I think there’s no question, that world wide, there is some slowing down going on.  Actually, in the USA residential housing is picking up and we’ve been waiting for that for a long time.  That will have a significant impact.  It hasn’t gotten to a big level yet…the general economy is a little bit better in the US.”

He sees definite slowing in some of his “real-time” businesses abroad which have slowed substantially.  Of course, this has also been seen across the board in multinationals and their earnings reports of late.

The more interesting comments were regarding his outlook on unleashing some of the cash hoard Berkshire has amassed.  According to CNBC Buffett says prices are “difficult” right now:

“Berkshire has $40 billion in cash on hand, but prices are difficult right now, he said, and Berkshire won’t get into bidding wars.”

I hate to read too much into his thinking, but I read that as meaning that stocks aren’t priced quite the way Buffett might prefer.  That makes sense using his favorite valuation metric.  The GNP to total market value is at 93% as of today which is well above the sub-80% level where Buffett likes to do his buying.

(US Total Market Cap vs GNP – via Orcam Financial Group)

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Maybe the stock market will crash so Warren “The Welfare Queen” Buffett http://www.americanthinker.com/blog/2009/04/warren_buffett_profits_heavily.html and his sidekick Charlie “The bailouts saved civilization” Munger http://www.rollingstone.com/politics/blogs/taibblog/u-s-sues-wells-fargo-yet-another-bailed-out-bank-accused-of-fraud-20121010 can benefit at the expense of the taxpayers once again.

    The grim reaper cannot come fast enough for these two crony capitalists!

  2. Not very useful? I disagree. It said to sell in the late 90’s and again in 2007 – warned you to get out at two very vulnerable times in market history. This ratio of SPX to GNP seems a worthwhile addition to our toolkit of market indicators. Thank you , Cullen!

  3. Total stock market value can probably be obtained from the Wilshire 5000 instead of the SPX, so pls correct my comment above.

  4. Hi M2M.

    I used GNP because that’s what Buffett says he uses. I guess he thinks it’s a better overall view of output and relates to corporations better than GDP. Makes sense I guess. Right?

  5. Yes I suppose so. If you think about it, you would want to try and catch as much economic activity as possible.

    I note that Gurufocus says that they use GDP because the GNP/GDP difference is only about 1%.

    My understanding is that Buffett also uses this as an indicator for his personal trading account.

    Regards
    Steve

  6. Warren Buffett: The Ultimate Market Timer?
    July 28, 2011
    By Jacob Wolinsky

    The idea seems crazy, but my friend who runs a value oriented RIA pointed it out to me and it seems that Warren Buffett has had some great market timing. My friend does not want to be named but I wanted to share some thoughts on the topic. I was going to do a formal write up but instead decided to leave it as our emails back and forth. The bold is my writing and the regular text is my friend. I also edited parts of the email to make the conversation flow better and took out parts not relevant to this topic. See below:

    Does anyone know how Warren Buffett predicted the crashes in 69 (he closed his partnership), 87 (he wasn’t buying for Berkshire) , 00 (the famous speech) and 08 (he was 100% cash in his personal portfolio in 06-07)? In spite of his pretensions that he doesn’t predict these things he seems to have the best record in doing just that. He doesn’t use simple valuation methods by themselves. Benjamin Graham doesn’t have nearly as good of a record as WEB–Graham thought that the market was already overvalued in the 50′s! For example, WEB has said is that the Market cap/GDP ratio is the single best measure of market valuation. But it does not explain why he was not buying in early 1987. This measure does explain why he was so bullish on America in late 2008. I would like to know what else he goes by besides this ratio. He has dropped hints that he combines this ratio with the number of good deals that he finds on the stock market. In other words, when this ratio is on the high side AND there are no bargains then watch out. However, this does not completely explain 1999. There were plenty of bargains in microcaps then. So what is WEB’s system?

    me: You make good points about Buffett but you really think he timed the market so well? I know that Berkshire had a huge cash load in the mid 00s while the bubble was building but if he knew a crash was coming it would have even been worth the taxes incurred to sell all or at least a significant amount of Berkshire’s stock portfolio, especially financials. Maybe Coke would be too expensive to sell because of the long holding period and it is less cyclical but why didnt he sell Wells Fargo for example? Buffett said that I think in regards to Market cap to GNP but either way it is very similar. Right now the market cap to GDP is 96 which is modestly overvalued but not super overvalued. Also if Buffett thinks that is the best measure in 87 it was not too high in fact it was low? Warren Buffett in my eyes is super hard to understand, Benjamin Graham is much easier to understand I personally think.

    WEB times the market now with his personal portfolio more than with Berkshire’s portfolio. He wrote in one of the letters that he was not planning on selling his big positions even if prices went up out of hand. Also, in his personal portfolio he was 100% cash in 2007 while Berkshire was buying. I don’t know about his personal portfolio in 2000, although he made that famous speech a few months before the bubble burst. He is super careful never to say anything that will embarrass him later on, and therefore that speech was a good indication that he was pretty sure than the bubble would burst before 2009. When I say that Buffett timed the market very well, I don’t mean that he got it right to the day. He himself says that he cannot predict the short term.

    Here is WEB record:

    1955? Opens partnerships against Ben Graham’s advice.

    1969: Closed partnership due to lack of bargains. The market went nowhere and then crashed.

    November 1974: Great deals – Forbes interview. The market zoomed up.

    November 1979: PUBLIC ARTICLE ANNOUNCING: Stocks on sale! The market did very well starting from 1981/2.

    1987: Cash buildup in BRK portfolio. In BRK letter says that there are few good deals. Then came the ’87 crash.

    November 1999: PUBLIC WARNING: Don’t expect the market to do well! And then the bubble popped.

    2006: 100% cash in personal portfolio. No public warnings.

    November 2009: PUBLIC ANNOUNCEMENT: Buy American, I am! Buys derivatives on the stock market index saying it will for sure be worth more in a decade. It has already paid off.

    When he makes a public speech or writes a article, that means that he was pretty sure of himself. When he went against the advice of Benjamin Graham (who he highly respected) to open the partnership in spite of Grahams warning to wait for the market to cool down, that meant that he was pretty sure of himself. What were his timing signals? No bargains: 1969, 1987, 2006. Lots of great bargains: 1950′s, 1974, 1979, (2009?). In public he talks about valuation. But his timing device seems to combine valuation with a heavy dose of “# of bargains”.

    It is amazing how accurate his personal portfolio has been with timing, I know you did not mean day but rather months or years. I still find it peculiar especially 87 since you can see from these charts below that market cap to GDP was quite low then, but who knows. He definitely has something about him that is hard to understand. I even ask people Buffett can buy outright maybe 100 companies in America which company will he purchase next? almost no one can answer. Lubrizol was not on anyone’s radar to my knowledge. On the other hand, everyone thought BNI was purchased at a hefty premium by any metric but it has turned out to be fantastic buy. I think besides Charlie Munger there is possibly no one who understands him 100%, although people like Walter Schloss probably understand him pretty well. And I am sure other people understand Buffett far more than me. I do not know why he would follow a different strategy for his personal portfolio than for Berkshire’s?

  7. i’m quite certain buffet is a market timer. i think he also uses some fear gauges to buy, but i’m not completely sure what they are.

  8. I’ll give you two to start:

    1) The change in the numerator could be due to the change in the number of public companies outstanding (relative to say private) rather than their valuation.
    2) A significant portion of US public company earnings are foreign, which have little to do with US GNP.

  9. What would you have done between 91 – 99, would you have sold at any point during that period.

  10. Hi Cullen, is it only a buy indicator or could you also use it as a sell indicator?

  11. A very large and variable part of the US economy is private. As this percentage varies, the ratio does also. In fact many of the most profitable enterprises in the US are private and not reflected by the current market.

    Yes this may (or may not) have been of use as a market timing tool in the past. But like most market timing tools as soon as more than a small minority are using it – it no longer works.

    Yes it looks good when back tested. But if it had been widely used back then, that historical data would look different.

    Folks just do not understand that no market timing tool can work for more than a short period of time before it becomes null due to its own success.

  12. A small minority probably does use it and a small minority will always use it. I agree, if everyone used it, it would by less useful, but if that were the case, wouldn’t that mean the market was efficient? At all times?

    I use it as one of my “macro” indicators and I must say that it has been an excellent indicator for me.

    Could it not be used as a “emotions” indicator rather than a technical indicator? Fear vs greed? Bull vs bear……

    Buffett has always stated “be greedy when others are fearful……” so couldn’t this indicator reflect the fear component?

    It’s history shows that if you had bought at these times you would have made a lot of money.

    regards