Warren Buffett said the U.S. economy is gradually improving, helped by the efforts of Federal Reserve Chairman Ben Bernanke to stimulate it, but that low interest rates have made bonds “terrible investments.” He also sees stocks going “far higher” from recent record levels.
He told CNBC that the U.S. economy is experiencing “gradual improvement” and is “moving forward, but at a slow pace.”
Buffett says he doesn’t like owning bonds right now – he thinks they are a “terrible” investment – and he doesn’t think average investors should own them either.
He also warned that another economic bubble is looming but didn’t give specifics.
“We will have another bubble and it will burst. It won’t be the same as the last one,” he said. “That’s been the history. You don’t have one internet after another. You have housing after the Internet.”
Buffett said the economy is benefiting from improvement in areas that hadn’t previously performed well, particularly homebuilding. He also said the improved economy is helping create increased traffic for NetJets, Berkshire’s private plane unit. “Demand has come back, but slowly.”
The world’s fourth-richest person said low benchmark interest rates, including overnight rates that have been effectively zero since late 2008, can help stimulate demand.
“When interest rates are low, and people expect them to stay low for a while, it pushes up the value of all other assets,” he said. “Interest rates act like gravity for all other asset prices.”
But many investors have also been drawn to bonds because their prices rise as rates fall, and Buffett said they could get their comeuppance when that process reverses.
“Bonds, they’re terrible investments now,” Buffett said. “That will change at some point, and when it changes, people could lose a lot of money if they’re in long-term bonds.”
He said that bonds are a terrible investment because they are “priced artificially.” He said owners of long-term bonds may see big losses when interest rates eventually rise. Buffett says bond prices are artificially inflated because the Fed Reserve continues to buy $85 billion of bonds a month.
He says the average investor should keep enough cash to be comfortable and invest the rest in equities.
Stocks, in contrast, are “reasonably priced,” though he continues to shy away from sectors such as media, where he cannot reasonably predict who will thrive in the long run.
“It’s a lot easier for me to predict that ketchup will be doing well or Coca-Cola will be doing well in 10 years,” Buffett said, referring to Berkshire’s pending takeover with Brazilian investment firm 3G Capital of H.J. Heinz Co., and Berkshire’s large investment in Coca-Cola Co. stock.
Buffett also said investors should not fear major stock indexes at or near record highs, provided they are investing for the long haul. “I don’t know how they will do in the next 10 days, and I don’t think anyone should think about it,” he said.
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