How is the current super-low interest rate environment going to impact economies around the globe? That’s the million-dollar question, says Warren Buffett, but no one knows the answer.
It’s a given that during times of great tumult such as ours, investors will be looking for support and guidance from the familiar, and what better to turn to than the tried and true advice from the Oracle of Omaha?
But as governments worldwide unveil massive spending packages and ultra-low or negative interest rates in efforts to keep economies afloat in the midst of the COVID-19 crisis, even Buffett feels like there’s no way to tell how it will all play out.
The one thing for certain, though? Now isn’t the time to be buying bonds over stocks, Buffett says.
“I have never been able to predict interest rates. I’ve never tried, I don’t try,” said Buffettin conversation with Yahoo Finance last Thursday.
“Charlie Munger and I, we believe in trying to function on what are the focus on what’s knowable and important now interest rates are important, but we don’t think they’re knowable,” Buffett said.
“My circle of competence doesn’t include the ability to predict interest rates a day from now or a year from now or five years from now. So I say, can I function without knowing that? It’s the same as predicting what business is going to do or the stock market’s going to do — I can’t do any of those things. But that doesn’t mean that I can’t do well investing over time.”
Buffett’s antipathy towards bonds is well known, as the Berkshire Hathaway CEO has stated in a number of his yearly letters to shareholders over the years that contrary to popular opinion, he’d pick a diversified, stock-heavy portfolio over the long-term rather than be bond-heavy.
The current crisis is putting countries further into debt as they try to support their millions of citizens currently or soon out of work. Last week, the Canadian government announced an $82-billion aid package involving income supports, wage subsidies and tax deferrals, while the United States has now indicated a fiscal package close to $2 trillion —for perspective, President Obama’s aid package in response to the 2008 financial crisis was $831 billion. The COVID-19 crisis and federal responses are also playing havoc with the bond market.
Last week saw a record $108 billion pulled out of bonds in the United States as investors cashed out and stock markets indexes showed double-digit losses for the week.
Buffett said the negligible interest rate environment will be good for stocks.
“It reduces the hurdle rate. That’s why they like to decrease it is that pushes asset values higher,” Buffett said. “If you promise to pay me something at three per cent a year, that would have been a terrible instrument for me to own, you know, at almost any time in history. But today, if you’re good for it. It’s fabulous.”
On the prospect of negative interest rates in US markets, Buffett said, “They puzzle me but they don’t scare me.”