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Warren Buffett, the "Oracle of Omaha," Tells German Audiences That the U.S. Economy is in a Deep Recession

By , Executive Editor, Money Morning •

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By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investment guru Warren Buffett said in an interview published Saturday in the German magazine Der Spiegel.

The United States is "already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects," Buffett said. "It will be deeper and last longer than many think."

As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

Buffett is the world's richest man, with a net worth of $62 billion. As the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), investors have for years followed Buffett's moves to see which investments are going to take off next. Financial-research studies actually show that mimicking Buffet's investment moves can be a most-profitable strategy.

A New Focus

Within the last year, Buffett has shifted his focus abroad - the precise strategy that Money Morning has been advocating since this global-investing news service was formed back in 2007.

Back in October, the Oracle of Omaha's trip to South Korea encouraged our own bullishness on that country's stock market.

And now Buffett has decided to have a look at Germany. However, Buffett remains most interested in German companies that are family-owned and well-managed. And he's always in the hunt for carefully selected companies with great brand names and strong market positions.

"If the world were falling apart I'd still invest in companies," he said.

Berkshire's recent play for U.S. chewing gum icon Wm. Wrigley Jr. Co. (WWY) underscores that willingess to invest in the "right" opportunity, regardless of the general economic outlook. Just last month - against a backdrop of recessionary and inflationary fears, a weak dollar, soaring energy prices, and a spiraling credit crunch - Berkshire joined forces with closely held Mars Inc. and agreed to provide $4.4 billion in financing for the $23 billion deal. In addition to providing the debt financing, Berkshire will make a minority investment in Wrigley, valued at about $2.1 billion. It's believed that Buffett is getting a discount on the Wrigley stake.

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Once the deal closes, Wrigley will become a separate Mars subsidiary. And there may be a lot more to the deal in the long run, sources say. By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand - the family-owned, medium-sized companies that are the backbone of the German economy.

"We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway," Buffett said to the Financial Times.

Buying into privately held companies - usually those whose ownership remains in the hands of the founding family - is an investment play Buffett has run time and again - and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett's headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven't been paying attention.

Buffett also renewed his criticism of the derivatives trading that helped create the current global credit mess.

Buffett Criticizes Waste

"It's not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health," Buffett told the German magazine.

Buffett complained about the lack of effective controls.

"That's the problem," he said. "You can't steer it, you can't regulate it anymore. You can't get the genie back in the bottle."

When it comes to choosing investment targets, Buffett favors companies that have a competitive advantage, offering products or services that can't easily be replicated by rivals. Businesses such as Mars and Wrigley, which each have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, recently told the Dow Jones Newswires.

The Wrigley deal is just the latest in a string of recent deals for the so-called "Oracle of Omaha." Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe's largest drugmaker.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

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About the Author

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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