Even Warren Buffett is confused by negative interest rates
Billionaire investor Warren Buffett may be known as the Oracle of Omaha, but even he never foresaw negative interest rates—nor does he quite know what they will end up meaning to the global economy and markets.
“You can read Adam Smith, you can read [John Maynard] Keynes, you can read anybody and you can’t find a word to my knowledge on prolonged zero interest rates—that is a phenomenon nobody dreamed would ever happen,” Buffett told CNBC in an interview Friday, a day ahead of Berkshire Hathaway’s (BRK.A) (BRK.B) annual meeting.
Uncharted territory it may be, but negative rates over much of the world haven’t dented the 85-year-old Buffett’s long-term optimism.
“That doesn’t mean I think it’s the end of the world when it ends, but I don’t think anybody knows exactly what the full implications” of negative rates will be, he said. “I hope to live long enough to find out,” Buffett said.
The Bank of Japan in January surprised markets by adopting negative rates. The European Central Bank in 2014 was the first major central bank to push the rate on deposits parked with it overnight to below zero. Central banks in Sweden, Denmark and Switzerland also have implemented negative rates. As of February, more than $7 trillion worth of government bonds around the world held yields below zero, according.
Critics of negative and near-zero rates complain that they hurt savers. Bond guru Bill Gross sees them as a threat to the very fabric of capitalism itself.
Buffett told CNBC that interest rates “act on asset values like gravity acts on physical matter.”
“When interest rates were 15% [in the early 1980s], you know it was an enormous gravitational pull on all assets, not just stocks,” he said. “If you can get 15%, it makes the choices way different than if you get zero.”
In a world where investors knew interest rates would be zero “forever,” stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return, he said.
Buffett also played down fellow billionaire Carl Icahn’s warning from the previous day that financial markets were headed for a “day of reckoning.”
Noting that there were likely tens of thousands of buyers and sellers on any given day in the market, Buffett said he wouldn’t “pick out any one of them and put too much weight on what they did.”
Courtesy of marketwatch.com