Beware of Warren Buffett’s Advice

http://www.reuters.com/article/ousiv/idUSTRE49G5Z620081017

Warren Buffett issued a letter on Friday morning advising investors to start buying American stocks.  Like many others, Buffett believes that this is just a cycle and everything will soon return to normal.  His motto is “be greedy when everyone else is fearful, and fearful when everyone else is greedy.”  He’s made tons of money with this philosophy which I’ve generally tried to follow myself, until recently.

Many people who offer financial advice seem to feel the same way.  They believe this is just another market cycle.  “We’ve seen this all before,” they say.  Maybe they’re right.  Is it correct to assume that the stock market will rebound because it always has before?  Personally, I see a lot of reason for caution.  I could buy into that philosophy if business conditions were normal.  But they’re not.  Consider the following backdrop for the current economic crisis, and then consider whether the market will simply behave as it always does:

  1. The world has never been more overpopulated and, indeed, more and more experts agree that, not only is the world overpopulated, but that the current population far exceeds the earth’s carrying capacity for supporting humans at a western-style standard of living.  And the world’s population grows by enough people to fill a new, medium-sized city every day. 
  2. In spite of the challenges of providing energy resources while cutting carbon emissions, and in spite of the growing burden of unemployment, America’s population continues growing by enough people to fill a new city the size of Chicago every year. 
  3. Our national debt per capita is at a record level, 50% higher than it was at the end of World War II, and soaring fast.  Never in our history has the per capita share of the national debt exceeded our median net worth.
  4. Our cumulative trade deficit since 1975, the year of our last trade surplus, now stands at $9.1 trillion and rises by $0.7 trillion per year.  Consequently, never has a greater percentage of American assets been under foreign ownership and control. 
  5. U.S. savings rates are at a record low level.
  6. Per capita consumer credit (or debt) is at a record high level. 
  7. In spite of reducing lending standards so low that “standards” no longer existed, providing a huge boost to the housing sector of the economy until the bubble burst last year, the U.S. was barely able to maintain a normal rate of GDP growth.  With the manufacturing sector of the economy already in ruins, now the housing sector is in complete collapse too.
  8. Never has the U.S. been closer to bankruptcy.

Perhaps the experts are right.  Maybe it is a good time to buy stocks.  But are you willing to bet your entire future that the market can behave normally considering the above headwinds that it faces?  Be very careful!

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8 Responses to Beware of Warren Buffett’s Advice

  1. Roman says:

    That advice is worth more then anyone realizes.

  2. Pete Murphy says:

    Buffett’s or mine? One thing we can say for sure: one of us is right!

  3. Pete, why you are right and Buffet is wrong.

    The first batch of the 78,000,000 baby boomers became eligible for Social Security this year. . . and there are 17 more years of them already lined up. In the next few years, all taxes being collected today will be required to pay interest on debt, fund Social Security and Medicare alone. The housing industry has totally collapsed; fewer homes were built this year than in 1945. The airlines for the most part are bankrupt. The banks for the most part are bankrupt. The auto industry for the most part is bankrupt. The Federal Government is for sure bankrupt. Eighty to eighty five percent of Americans are broke. The stock market and consequently our retirement funds are currently down some 40%. Our trade imbalance with the world is $700 BILLION per year and climbing. Americans have lost jobs each and every month for the past 9 months with no end in site, while some 100,000 immigrants enter the U.S. each and every month legally, looking for work. College educations have become so costly that the resulting employment can no longer justify the expenditure, while at the same time, many, if not most, of our highly educated jobs are being outsourced. We are fighting two wars and looking for more at a cost of American lives and $10 billion per month. And, we are running out of energy in a country where we are dependent on foreign nations for 70% of that use.

    All of the former minor issues are the good news. The bad news is that man cannot and will not trump the laws of natural physics including the first two laws of thermodynamics by printing more money and growing our domestic population; which if you haven’t noticed, is the plan.

    But, don’t let any of this worry you, get out there and buy more stocks, they’ll come back; sure they will.

  4. Pete Murphy says:

    Mike, the silver lining in all of this may be that it’s what has to happen for our government to wake up to the fact that we can’t sustain such a large population at our current standard of living. We can only hope that they’ll choose to stabilize (and then reduce) our population instead of reducing our standard of living in order to make room for more people.

  5. Vladislaw says:

    The retiring of the baby boomers means that the USA will be facing ENORMOUS labor pressure. We are already seeing shortages in nursing, etc. When the US could allow immigrants in from white europe it was easier for politians. But those sources have dried up. EVERYONE in congress understands the US is facing a shortage of about 40 million workers. That would mean we would have to allow 2 million PER YEAR come in from mexico and south america.

    Why is it that EVERY congress person might TALK about border controls, DEMAND border control, INSIST on a FENCE ( and then cut the funding for that very same fence) but NOTHING serious EVER HAPPENS, except a new amnesty?

    The reason is simple, Adam Smith explained it in “An Inquiry into the nature and causes of the wealth of nations”. The TRUE wealth of a nation was the number of the population, how educated, and how free they were to pursue their own thing.

    NUMBER of the POPULATION, the BIGGER your population the BIGGER your country (empire) could be. Everyone seems to feel China and india are the up and comers, and why not believe that, if everything is the same ROUGHLY, they capitialist countries and educated, so they should outpace America UNLESS America can INCREASE it’s population numbers.

    That is why President Bush met with Fox, and Martian, from mexico and canada, in the hhopes of creating a United States of North America. All in the hopes of increasing the USA’s population to compete with india and china. A USA with a population of 600,000,000.

  6. Pete Murphy says:

    Vladislaw, you are speaking of some sort of parallel world that is detached from reality. The reality is that unemployment in the U.S. is soaring, with a half million workers filing for unemployment every week. Unemployment in China and India is far, far worse as their grossly bloated labor forces desperately prey on healthy markets. President Bush’s policies of trying to prop up our failing economy with the housing sector, by reducing lending standards and by flooding the country with immigrants, is an abject failure and is the main reason behind our economic melt-down. You need to stop quoting 18th century “economists” and take a look around at the results of their discredited philosophies.

  7. FJ says:

    Great post, mike, excellent summary of the problems we face today.

    I say let the free market do the talking, let these assets come down in value, and allow states to put into practice some plans to reduce population.

  8. FJ says:

    It’s really terrible that we invite a higher population into our country which only decreases true democracy (check out Dr. Albert Bartlett’s series of videos on YouTube). Once the government continues to get so involved in our daily lives AND wants there to be more of us that they can control and collect taxes from, this country will degrade into a military state when we’re too bankrupt to run our empire abroad. we don’t manufacture ANYTHING in ths country anymore, it’s just really sad. Our own government is to blame for this.

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