Warren Buffett on interest rates

Warren Buffett is highly regarded as the smartest and most successful investor in the history of the world

Warren Buffett’s investment timing and predictions suggest he has a crystal ball and can predict the future. Self admittedly, he confesses he was wrong about interest rates and the outcome of the fed reserve policies. His prediction of doom never realized. Recently, he has come under heat for alleged predatory lending practices of his mobile home business Clayton Homes and has been led into more conversation about interest rates. Putting aside the challenges to Buffett’s integrity, Buffett brings a new idea into the discussion about interest rate prediction. While business leaders and economists predict rates will go up, the question is when? It was widely reported early in 2015 that the Federal Reserve would announce hikes in June and now that prediction has been pushed to September. A strengthening economy, higher wages, increase in the costs of goods, in other words – inflation will take the blame. Buffett brings attention to another reason not usually in the discussion. Buffett says the continued weak economy in Europe makes it difficult for the Fed to raise rates as it will further strengthen the dollar and weaken exports, If you are planning a trip to Europe you know what this means. Because of the strong dollar, your trip now costs a third less than it did a couple of years ago and conversely, goods from America cost one-third more to European buyers. Any increase in business costs makes America less competitive in the world market. What does this mean for Texas? What Buffett suggests is we have a world economy that America alone cannot control through actions of the Federal Reserve. similarly, we Texans have an economic island and have enjoyed the benefits of a low National interest rate policy in a very strong regional economy and weak national economy for a long time. Our question is; “What effect will rate increases have on our local economy?”. As with the past recession, Texas should be less sensitive to economic changes but not immune. Further, what goes up must eventually come down or at least slow down. Our meteoric rise in oil production, population, jobs and housing prices will slow down. It is impossible to have 10% per year rising home prices forever. Income, simply cannot keep up with home prices and supply will increase and better match demand.  Interestingly, Buffett calls the policy of zero interest rates throwing money from a helicopter. It has been six years of zero rates. How long can this really last? Back in 2009 local economists dubbed the term “Texas Triangle” and predicted a doubling of the Texas population to 38 million people by 2050. So far, that prediction is holding true but common sense says it can’t last. So, will lower interest rates trigger decline or simply slow things down? A slow down is the more likely scenario. Buffett also says stocks will no longer look cheap when rates rise and will go down. Of course, Mr. Buffett is human and all his comments are self-serving in some fashion. Source: Warren Buffett says raising interest rates hard as Europe struggles – The Economic Times Source: Warren Buffett: I was wrong about interest rates and Federal Reserve – Fortune Source: Buffett says stocks overvalued with normal rates – Business Insider Source: Warren Buffett’s bad housing advice – Fortune Source: The mobile-home trap: How a Warren Buffett empire preys on the poor | The Seattle Times Source: Economist predicts Dallas-Fort Worth economies will grow faster than U.S. through 2019 | | Dallas Morning News Source: Texas CEO Magazine 2015 Economic Forecast: Austin – Texas CEO Magazine Source: Texas Triangle – America 2050