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From Staff Reports
According to economists, the U.S. economy isn't in a recession.
Don't tell that to Warren Buffett.
Buffett, the billionaire investor known as the "Oracle of Omaha," says he's seen a "significant slowdown" in the businesses that are part of his company, Berkshire Hathaway Inc., (BRK.A, BRK.B) – which tells him that the U.S. economy has dropped into a recession.
Buffett also says that stocks are "not cheap," despite steep declines that have caused the Dow Jones Industrial Average to drop 14% from the record high levels it reached last year. As of Monday's close, for example, the 30-stock Dow has shed 1,939.2 points from its peak at 14,198.10.
Speaking Monday on the popular financial cable-TV station, CNBC, Buffett said the economy is clearly deteriorating badly, even though it's yet to actually fulfill the classic definition of a recession, with gross domestic product (GNP) having posted two straight quarters of decline.
The National Bureau of Economic Research, or NBER, determines when recessions occur, a task that happens after the fact.
Buffett also said the U.S. housing slump and the badly sputtering economy are putting the squeeze on Berkshire's 76 operating units, which markets such products and services as furniture, jewelry, specialized metalworking services, ice cream, candy, real estate services, insurance, paint, and underwear – and which also acts as a major investment vehicle.
"By any common sense definition, we are in a recession," Buffett said. "Business is slowing down. We have retail stores in candy, home furnishings and jewelry; across the board, I'm seeing a significant slowdown."
Last week the Commerce Department said U.S. GDP rose at an annual rate of just 0.6 percent in the fourth quarter.
Often referred to – and regarded as – "the World's Greatest Investor," the 77-year-old Buffett is one of the world's richest people. Last summer, Forbes estimated his net worth at $52 billion.
In the cable-TV interview, Buffett said economic conditions have not yet deteriorated to levels seen in 1973 and 1974, a deep recession that was also marked by soaring oil prices and major share-price declines. But U.S. Federal Reserve Chairman Ben S. Bernanke faces a "very tough" balancing act because of two key competing problems: Inflation is escalating even as economic growth is in danger of slowing to the point that it topples into a recession [an "official" one].
In the early 1970s downturn, the U.S. economy "had this stagflation situation, and we really had a meltdown in equity prices," Buffett said during the interview. "We are seeing more fixed-income-type forced liquidations. We are seeing more indigestion at banks with a lot of loans they don't want to have. So you're seeing a time of easy money in terms of price, but not so easy money in terms of availability."
While Buffett said he's always looking at beaten-down shares, this time around he's also looking at bond-related investments that could rise in value. That's because stocks still aren't cheap, despite the sell-off that's taken place since key indices hit record highs last year.
"I find more things to look at now than I did six months or a year ago, but I would say it's changed more dramatically in the fixed-income market than it has in the equity market. That may be where I find the opportunities," Buffett said.
[Editor's Note: For a related story in today's issue on stagflation, please click here.]
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