Food & Economy Memo: Warren Buffett, 'The Oracle of Omaha,' Says U.S. Economy Essentially is in a Recession

Legendary billionaire investor and major food and grocery industry company owner and stockholder Warren Buffett says that the U.S. economy is basically in a recession even if it hasn't met the technical definition of one.

Buffett, Chairman and CEO of Omaha, Nebraska-based holding company Berkshire-Hathaway Inc., said in an interview last week on the cable business network CNBC the reports he gets from the retail businesses his holding company owns show a dramatic slow-down in consumer purchases.

The legendary stock-picker, and world's second-richest human according to Forbes magazine, said in the CNBC interview millions of people also have lost equity in their homes because home prices have dropped so significantly.

"I would say, by any common-sense definition, we are in a recession," Buffett, who is often referred to as the "Oracle of Omaha," said on CNBC. However, he added it's not clear how far the recession will go because that is near-impossible to predict.

Buffett's Berkshire-Hathaway holding company owns some 50 company's, ranging from Gieco Auto Insurance, home of the famous "Caveman" television commercials, and the Acme Brick Company, a seller of bricks for residential construction, to Netjets, the world's largest provider of fractional private jet time, and Fruit of the Loom, maker of men's and woman's underwear.

Additionally, the holding company owns a number of companies in the food and grocery industries. These include: confection company See's Candies, convenience store grocery wholesaler and logistics provider McLane Company, The Pampered Chef, a retail chain of upscale kitchen equipment and gourmet products, and International Dairy Queen, the fast-food restaurant chain. [View a complete list of Berkshire-Hathaway-owned companies here.

Through his holding company, Buffett also is one of the largest shareholders of Atlanta, Georgia -based beverage industry giant Coca-Cola. Coke was one of the first companies the "Oracle of Omaha" invested in when he started Berkshire-Hathaway. He also is the single-largest individual shareholder in Kraft Foods, and owns sizeable portions of consumer packaged goods giant Proctor & Gamble and beer maker Anheuser-Bush, marketer of Budweiser brand beer.

Buffett's Berkshire Hathaway also is one of the single-largest shareholder in United Kingdom-based grocery and general merchandise retailer Tesco plc. His holding company owns about $1.3 billion worth of Tesco shares, which works out to around a 4% ownership stake in the company. The legendary investor also owns a sizeable chunk of Wal-Mart, Inc. stock. Wal-Mart is the world's largest retailer; Tesco plc. is the third-largest in the world.

Buffett is a "buy-and-hold" investor rather than a trader. He has said he sees strong long-term value (and eventual solid profits) in Tesco plc. In fact, he increased his investment stake in the British retailer late last year, shortly before the company opened its first Fresh & Easy Neighborhood Market grocery stores in the Western United States.

What about the "Oracle of Omaha's" track record? Well, keep in mind that the U.S. stock market on average has grown historically by about 10% per year. Meanwhile, Buffett's Berkshire Hathaway has grown on average by more than 21% annually since 1965. Today, the holding company is worth more than $200 billion. Ten thousand dollars invested with Buffett in 1965 has grown to be worth more than $36 million today. The "Oracle of Omaha" is personally worth about $45 billion, the majority of which he is giving to the Bill and Melinda Gates Fountation to be used for charitable causes.

Although the legendary investor is calling a recession in the U.S., technically there isn't one at present. The technical definition of a recession most economists' use is two consecutive quarters of negative growth in the nation's gross domestic product.

Last Thursday, the U.S. Commerce Department reported that the gross domestic product increased at a low 0.6% pace in the quarter that ended December 31, 2007. In the previous quarter--July - September, 2007--the U.S. economy grew at a strong 4.9%.

About half of the economists in the U.S. believe the first quarter 2008 growth in the U.S. economy will either be about what it was in the fourth quarter of 2007, or will actually be negative. These economists argue either the U.S. is already in a recession, or heading for one soon.

The other roughly 50% of U.S. economists say they are either unsure, or that its possible the U.S. can avoid a recession completely, especially since Congress passed an economic stimulus package, which starting in May will result in checks ranging from $600 -to- $1,200 being sent to every American who files a 2008 tax return. (This 50-50 split reminds us of the "on the one hand, but on the other hand, joke about professional economists.)

Despite saying the U.S. is already in a recession, the plain-talking Buffett added he believes the U.S. economy will be just fine in the long run. "Over time, my children are going to live better than I do, although they don't believe it," Buffett said on CNBC.

In addition to the dramatic decline in the gross domestic product in the last quarter of 2007, unemployment is increasing in the U.S. This includes the states of California, Arizona and Nevada, where Tesco's new USA venture Fresh & Easy Neighborhood Market has its small-format grocery stores. In California, the unemployment rate has increased by two full percentage-points since late last year.

Energy costs, especially gasoline, also have gone up significantly in the U.S. in the last year. The per-barrel price of oil is now well-over $100. The average cost of a gallon of gas at the pump is currently about $3.20 per-gallon in the U.S. and about $3.45 per-gallon in California.

Food inflation also is hitting the U.S. economy hard. On average, grocery prices at retail are up nearly 10% in the last year, with prices on commodity items like milk and eggs up nearly 20% from early 2007. For example, Steve Burd, CEO of California-based Safeway Stores, Inc. said two weeks ago in a conference call with supermarket analysts that food and grocery price inflation is currently the highest he has ever seen in his 15 years as CEO of the grocery chain.

Buffett tends to call things as he sees them, rather than waiting for the "official" word on economic issues like recession. His view is similar to that of the American consumer, who is feeling the pinch from rising energy costs, higher food prices, the financial market's credit crisis and rising unemployment.

Like Buffett, consumers aren't all that interested in waiting to find out if the U.S. economy is really in a recession. Rather, they are feeling the effects of the serious economic downturn--as are the nation's retailers--in their pocketbooks.

Friday Fishwrap: Business & Economy Memo

Warren Buffett Speaks: The 'Oracle of Omaha' on business, the U.S. economy, society and politics. He says the current sub-prime and securitized mortgage credit mess in the U.S. even perplexes him.

On Tuesday, billionaire investor Warren Buffett joined U.S. Presidential candidate Senator Hillary Clinton on a ballroom stage at the Hilton Hotel in San Francisco for a combination fundraising luncheon and question and answer session covering a wide range of topics.

On stage, Senator Clinton played the interviewer (a switch for her these days), asking Buffett her own questions and reading pre-written audience questions addressed to the legendary investor, about business, the U.S. economy and other weighty issues.

About 1,500 people paid from $100 to $2,300 to attend the luncheon and Q&A session with the Presidential candidate and the humble billionaire from Omaha, Nebraska. The event was a fundraiser for Clinton's Presidential campaign.

However, the Senator from New York and two-term First Lady doesn't have Buffett--or his support--all to herself. Instead, the 77 year-old founder and Chairman of holding company Berkshire Hathaway Inc., says he's supporting both Clinton and Senator Barack Obama for the Democratic Presidential nomination. He's also helping both raise money for their campaigns. (Half of Buffett is better than none of Buffett might be the feeling both candidates have.)

Buffett's Berkshire Hathaway Inc. owns 49 companies. Among these holdings are a number of food and grocery industry companies: confection maker and retailer See's Candies, grocery and foodservice distributor McLane Company, and International Dairy Queen, Inc., the fast food restaurant chain. Through Berskshire Hathaway Inc., Buffett also owns $1 billion worth of stock in British international retailer Tesco, which is a 4% to 5% ownership stake in the company. Tesco launched it's first U.S. retailing venture, Fresh & Easy Neighborhood Markets, last month in Southern California, Arizona and Nevada.

Below is a snapshot of Buffett's answers (and opinions) to questions asked by Senator Clinton and audience members at Tuesday's luncheon and Q&A session with the Presidential candidate and the billionaire:

Buffett on sub-prime and securitized mortgages, those risky financial instruments that have put the U.S. economy on the brink of recession.

Buffett: "You can't turn a financial toad into a prince by securitizing it," the Sage from Nebraska told Senator Clinton in response to a question she asked on the topic.

Buffett added that "even after spending a considerable amount of time scrutinizing funds that package up (the) mortgages", he found them confusing. Comenting on the morgages, Buffett said: "One can make more money selling toxic waste to customers (too), but that doesn't mean it's a good idea."

"In believing it's own PR on this (the mortgages)--they (Wall Street) started holding the stuff (securitized morygages) themselves (the funds and firms) because they couldn't sell it. It worked wonderfully until it didn't work at all. Now Wall Street is reaping what they've sown," Buffett said. "It will work itself out over time with a fair amount of pain. We (the U.S.) have an economy that can take it," he concluded.

Buffett on tax disparities in the U.S.:

In response to an audience question about the U.S. tax code, Buffett said he recently surveyed 13 workers in his Omaha, Nebraska office and found they paid an average tax rate of 32.9%, compared to the 17.7% that he, the worlds second-richest man, pays.

"My cleaning lady pays a higher tax on her earnings than I do on my dividends and investments," he told the audience. "It's better to earn in the boardroom than in the bathroom."

Buffett on the repeal of the estate tax:

Buffett, who's giving most of his fortune (estimated at about $50 billion currently) to the Bill and Melinda Gates foundation over a period of time while he's still living, told the crowd he opposes the repeal of the estate tax in the U.S. The estate tax brings in $24 billion a year to the federal government's coffers.

"Leona Helmsley (the late New York multi-millionaire who was nicknamed the "Queen of Mean" for the way she treated her employees) left $12 million to her dog," Buffett said smiling. "If there was no estate tax, the dog would have gotten $22 million."

Buffett on the growing income disparities between average and wealthy Americans:

"In the last seven years, the super-rich have gotten a huge break," Buffett said. "It's been a marvelous, marvelous time to be super rich. But too bad, nothing trickles down," he added.

Buffett on the U.S. economy and its ability to rebound:

Buffett told the Hilton ballroom audience he has faith in "the ability of the American economy to generate more and more prosperity. The real test of this country will be how widely is that prosperity shared," he added.

The "Oracle from Omaha" sounded a cautionary note when he said he feels "strongly that the U.S. is making a serious mistake by importing $2 billion a day more than it exports."

He explained with an analogy: "If you force-feed $2 billion a day to the rest of the world, they get somewhat less enthusiastic over time--and their dollar is worth less," Buffett said. "We're (the U.S.) like a very rich family; we own a farm the size of Texas but want to consume more than the farm generates. Every day, we sell off or mortgage a piece of the farm."

"If this policy continues, the rest of the world will own more of our farm," Buffett added. "Future generations will not like that they spend part of their workweek paying off (this generation's) cost of consumption."

Buffet on how he chooses and votes for a Presidential Candidate:

Answering an audience question about how he chooses a candidate, Buffet smiled and said, "I vote the same way I select a CEO--I'm looking for someone with brains and quality who can lead."

Our view:

Suggestion to both Clinton and Obama: You could make a worse choice than Warren Buffett as your Vice Presidential running mate.

Why? He will keep you down to earth for starters. The Oracle of Omaha's favorite beverage is Diet Coke. His favorite meal is a burger and milkshake from Dairy Queen. Buffett suffers no fools.

He also would provide you with an ongoing education on the U.S. and international economies. Buffett's favorite hobby isn't a hobby--it's reading and gaining more knowledge than he already has. He's said that's the main reason he owns a newspaper among his many holdings. He's also a pretty good investor, we might add.

Buffett also would be a pretty good point-man in the selection of your Secretaries' of Commerce and Treasury. One can imagine he would have a few good questions for the perspective candidates for those positions.

Buffett is the perfect link to both Wall Street and Main Street. He's as comfortable in the boardroom as he is on the shop floor, or talking to managers at the local Dairy Queen or See's candy shop. Buffett also has a great BS detector--something every President should demand his key aids come equiped with--and use.

Buffett also wouldn't be too shabby as an international representative, a role Vice Presidents seem to have been filling more and more in the last two administrations. The plain-spoken Sage from Nebraska is well-known and respected internationally at the highest levels of government and business. When recently in China, Buffett was mobed on the street like he was a rock star. (He is an economic rock star in capitalisy-hungry China.) He also was invited to meet with China's top government officials when they heard he was in town.

Lastly, Buffett is frugal--notoriously so. Don't believe us? Take a look at the Berkshire Hathaway website, for example. Spare comes to mind. He also travels alone, even internationally. No aids, assistants or secretaries travel with Buffett. He does take a handful of the Presidents of his holding companies with him wherever he goes overseas. But there's a frugal strategy behind that as well. Buffett says if there's an opportunity for a company President to do business in a country he's traveling to, he takes them because it helps make the trip better pay for itself in terms of a cost-benefit analysis.

If, as most of the candidates say, they want to cut spending--Buffett's your man for that. If allowed to, he could probably find so much waste in government that Congress would be faced with a new problem: How to spend the huge surplus the legendary investor handed them. Our tongue is only partially in our cheek, by the way.

These are just a few of Buffett's many qualities. In fact, he's probably overqualified for the VP position. And, alas, we doubt either Clinton or Obama--or any other candidate--will ask Buffett to serve as their VP. However, the next President--Democrat, Republican or Independent--would be well-served to ask Buffett for his advice on a wide-range of economic and social issues. If the new President does that, he or she also will get that Washington, D.C. rarity--the honest, plain-spoken, unvarnished truth as Buffett sees it.

(Photo of Hillary Clinton and Warren Buffett courtesy of KCBS Radio.)