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Forbes Financial Round Table: Berkshire Hathaway's Fate VAHAN JANJIGIAN: What do you think would happen to Berkshire Hathaway if Warren Buffett were to suddenly retire or worse?
HENRY MERCER: You always worry that he's going to slip in the shower at night. But, honestly, I view Berkshire as Buffett's masterpiece. He's like a Rembrandt. He's compiled a collection of businesses that throw off tremendous levels of cash. In effect, it can run itself after he's gone. It's not publicly disclosed, but there is a succession plan. There will be somebody to run the investment portfolio. That's the real key issue. No one will do it with his talent, but it's a wonderful collection of businesses. If Warren were unfortunately to pass away, we would be a buyer of the stock should it fall. But I hope he lives to 100.
MIKE HOLLAND: Last issue first here. As a long time owner of Berkshire, I truly believe that if Warren Buffett were no longer running the company the stock can go down a lot. [LAUGHS] It may be an opportunity to buy some interesting businesses. There's no question he's been the difference there.
But to Byron's point, I think one of the reasons for his insecurity is that every time it is different and this time it isn't the '70s. We have a different situation. We can have some forms of stagflation, but different things will cause it because we have a different world today. Among the things that are different is that in the early '90s, mid '90s and late '90s, when we all were starting to go over to China a lot, one of their main exports to us was deflation. Well, that stopped and now they're importing a little bit of inflation. They've got well-publicized food inflation over there, but they also have some other inflation that they don't talk a lot about starting with wage inflation in Beijing and Shanghai. So that's a little scary.
Having said that now, I think that one of the problems for anyone who is exposed to the consumer is that the consumer has become really smart. Because of technology, the consumer doesn't pay a lot anymore. They've figured out ways to buy the cheapest car, the cheapest computer, the cheapest clothes -- the highest quality at the lowest price. This means there is squeezing of margins that tend to offset some of the inflation at the consumer level. I don't know that. That's one of the reasons there's a problem there. So the actual inflation that we experience I don't know how bad that's going to get.
The other part of that was interest rate. We actually had, in the '70s periods, a situation where the U.S. treasury bonds were trading at several hundred basis points below the inflation rate. It made no sense. That situation is beginning today. We've got the two-year treasury below three percent, the 10-year treasury below four percent and pick a number for inflation. What's inflation today? Doug, what would you say if someone said what's the inflation rate?
DOUG COHEN: To the point, there are a lot of different ways you can define inflation. Real inflation is probably close to 4 to 4.5 percent.
BYRON WIEN: If you treated the CPI sensibly, i.e., you didn't have owner’s equivalent rent at 24 percent and if you took the transaction prices for houses being sold, inflation would be about 4.5 percent as you suggest.
I think the 10-year treasury yield is 100 basis points below where it should be. I think it's there because foreign governments are so awash in liquidity. They bought U.S. treasuries as a safe haven, but now they've seen the dollar depreciate and they're rethinking that.
If you get a situation where foreign governments that are large acquirers of U.S. dollars start to diversify their assets and not put the money automatically into U.S. bonds, you could have interest rates rise very sharply -- regardless of what the inflation rate is. It's dollar-related. And of course if the dollar is weak that's an inflationary phenomenon because the United States, having dismantled its manufacturing establishment, is dependent on foreign goods for our survival. This is something people aren't sufficiently worried about.
As I said at the beginning, it's the thing I'm most insecure about. I can make a pretty good case that we could have a stagflationary environment.
Next: Forbes Financial Round Table: Commodities
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