Buffett Ignores Gross’s New Normal, Pities Bond Investors

Warren Buffett, chairman of Berkshire Hathaway Inc., said he ignores macroeconomic forecasts such as Bill Gross’s “new normal” when investing and sympathizes with people who stuck with bonds amid low interest rates.

“It doesn’t make any difference to me what he thinks about the future,” Buffett, 82, said of Gross, manager of the world’s biggest bond fund, at Berkshire’s May 4 shareholders meeting in Omaha, Nebraska. “I have a general feeling that America will continue to work well.”

Gross’s firm, Pacific Investment Management Co., coined the term “new normal” in 2009 to describe an era of lower returns, heightened regulation and shrinking U.S. clout in the world economy following the 2008 financial crisis. The view contrasts with Buffett’s optimism about the country where he and Berkshire Vice Chairman Charles Munger, 89, built a business valued at more than $260 billion.

“I like Bill Gross,” said Buffett, the second-richest man in the U.S. “My own guess is that people will do very well owning good businesses if they don’t pay too much for them.”

Buffett employed that strategy for more than four decades as he accumulated the largest equity stakes in companies such as Coca-Cola Co. and Wells Fargo & Co. and built insurance operations. He reshaped Berkshire in the past 15 years by buying a chemical maker, energy companies and a railroad.

Berkshire Profit

First-quarter net income jumped 51 percent to $4.89 billion or $2,977 a share, as profit improved at the largest operating segments and investment gains added to earnings, Berkshire said May 3 after the close of regular trading. The shares climbed 1.3 percent today to $164,990, a record close.

“A lot of people in the business are trying to pick the next macroeconomic event, because it’s sexy,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which oversees Berkshire shares. Buffett and Munger were communicating that “predicting the economic future isn’t the way to compound money.”

Shareholders asked Buffett and Munger several times for their views on the economy and Federal Reserve at the annual gathering, which draws tens of thousands of people. The central bank has kept interest rates near zero since December 2008 to bolster the economy. It also embarked on a bond-buying program that ballooned its balance sheet to more than $3 trillion.

“I feel sorry for people that have clung to fixed-dollar investments,” Buffett said. Savers depending on bond payments are “victims” of policies to lower borrowing costs, he said.

Gross’s Response

“Warren feels sorry for bondholders,” Gross said late today on Pimco’s Twitter account. “Pimco believes their future returns will be low because their yields are low, but lots of holders need bonds.”

The “new normal” outlook is intact, Gross said May 3 after the U.S. unemployment rate fell in April to a four-year low of 7.5 percent. The nation’s gross domestic product rose at a 2.5 percent annualized rate in the first quarter following a 0.4 percent fourth-quarter advance, according to Commerce Department data.

“We don’t see higher real growth than 2 percent going forward,” Gross, 69, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “We’ve seen basically 3.5 percent nominal GDP growth even in the midst of an accelerating housing sector.”

The Pimco Total Return Fund advanced 10.4 percent last year and beat 95 percent of its peers, according to data compiled by Bloomberg.

Housing Market

Buffett, who is also Berkshire’s chief executive officer and oversees units that make bricks, paint and carpet, told shareholders that the housing market is improving.

“What we see is a slow progress in the American economy,” he said. “We’ll move forward but I don’t think we’ll be in any surge of any sort, but I don’t think we’ll stall either.”

While he’s open to deals in other nations, he said more opportunities may be in the U.S. He previously called his largest acquisition, the $26.5 billion purchase of the Burlington Northern Santa Fe railroad in 2010, an “all in wager” on the world’s largest economy.

Buffett will be aided in his hunt for deals by a cash pile that climbed to a record $49.1 billion as of March 31. Any amount of cash higher than $20 billion is “too much,” Buffett said in an interview with Bloomberg Television’s Betty Liu after the meeting.

Lower Returns

Buffett’s comments on “new normal” were in response to a question about the prospects of people saving for retirement and whether they should expect lower returns.

“I kind of agree with Bill Gross,” Munger said. Market results below historic averages are a “conceivable outcome,” which means those facing retirement may want to work a couple more years, he said.

Buffett and Munger agreed in their support of Fed Chairman Ben S. Bernanke’s efforts to support the economy.

“They had to hurt somebody, and the savers were convenient,” Munger said. “I would have done what they did. I would have felt bad about it, but that’s what I would have done.”

Bernanke “had a lot of guts,” Buffett told Liu. “I’ve got a lot of confidence in him. I’d be interested to see how he unwinds” the measures designed to ease borrowing.

When asked how the Fed should proceed, Buffett said, “I don’t know. That’s why I’d be interested.”

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