To understand what Buffett is saying, consider the following chart of a hypothetical history of Gross Domestic Product (GDP), a measure of the output of an economy.
GDP starts to drop at time A, begins to increase again at time B, and recovers to its previous high at time C. By the usual definition, the recession lasted from A to B, and the recovery started after B.
But Buffett says that people are still suffering while GDP levels are depressed. He says that the recession is from A to C and that the period from B to C is just a “technical recovery”.
Just because things are improving, we can’t conclude that things are great. At some point in the winter it starts to get warmer, but it is still cold. Winter is over when it warms up, not when it stops getting colder. As is usually the case, Buffett makes a lot of sense.
I like the winter analogy. I kind of agree with Buffett on this, but I think it's important to celebrate the return of growth too. Just knowing that things aren't still getting worse might encourage people to get out and invest and spend, which might give the economy further growth.
ReplyDeleteStill, the US economy is still very weak, so claiming the recession is over sounds disingenuous. So many people are out of work, and house prices and sales are still not recovering.
Do you think Buffett is busy buying more stock (while the U.S. economy is weak)?
ReplyDelete@Gene: It's definitely true that it's nice to know that things have stopped getting worse. But Buffett has a point as well.
ReplyDelete@Financial Cents: Buffett's writings make it clear that he makes his decisions about stock purchases based on the merits of the company and price, and he doesn't take into account macroeconomic conditions. That said, he may be buying stock in companies he likes but whose stock has been beaten down. I prefer to own BRK than to try to track Buffett's purchases.