Mohamed El-Erian on Warren Buffett's 2021 annual letter

maybe we should start with those comments on bonds on bonds not being the place to be now he was specifically talking about government bonds but then went on to say you know the junk bonds are not really the place to be either because you're not getting paid for the risk what do you think so he was talking about when bond yields for the 10-year were below one percent and you're right he said bonds government bonds are not the place to be and then he took a swipe at high-yield bonds as well i think what he is saying has been consistent with the view which is be careful of bonds at those levels it would be interesting to see what he would write when the 10 years at 140 plus as it is today that's a really good point this letter is one that buffett works on through the course of an entire year i heard saw some people speculating last week that maybe he'd be commenting on what charlie munger had to say last week but you know this this is something that is written over time that he works on all year and that's gone to pre to to print uh long before some of these changes that we've seen what i would say though is what he points out that you have seen people move out the risk spectrum that that's been pretty interesting to watch and to see the idea that you shouldn't be jumping into these junk bonds either that you're not going to get paid for the risk there yes the image i have in my mind and he picks it up in in four different ways in fact the image i have in my mind is that all this apple liquidity has provided the foundation to build the building and that building has been risk-taking on the basis of liquidity not fundamentals and we've added a floor after floor he talks about various financial engineering transactions look at celebrity specs etc and everybody wants to be in the penthouse so there's always a question mark are the foundations strong enough for the building we've built but his messages are very clear which is it's hard to find cheap stocks if you value investors he didn't like bonds at that point and he believes in america as we all do and he doesn't want to fade the us which i agree with so if you put all these three things together it leads him to buy back his own stock and it speaks to a very important signal to investors is whatever you do at this point make sure you know really well what you're buying you know one thing he said though is that they would not even be spending that money to buy back their own stock if he and charlie munger didn't think that their stock was undervalued um they look at it very closely and and do a real cost analysis of these things and you know they'll sit on the cash for forever as they've proven in the past rather than spend it on things that they think are overvalued they don't think berkshire shares are overvalued here at least they haven't to what they were buying it was almost 25 billion dollars that they purchased last year in their own shares that's right and and remember berkeley highway hasn't been one of the fads we've had various fats go on and they haven't fallen to one of them so in relative terms they've looked cheap and he's absolutely right to do what he's done you know we're just looking at the top five holdings for berkshire hathaway verizon is the new entrant that was kind of a surprise we just found out about that um very recently that they've been buying verizon shares chevron also made its way into the top ten he's pretty consistent in terms of saying we buy things and we hold on to them for a very long time you still see american express and coca-cola which have been there for the top you know in the top five for the last 20 years or so that's pretty impressive but you do see him switching out of things it's worth noting that three of the top five weren't there 10 years ago yeah and the big one is the airlines of course because he wrote a lot about that yeah um last time and and he sold his airlines and i suspect he looks back now and thinks maybe i should have waited i also like the fact what you said in the beginning about apple here's someone who in the beginning was very suspicious of text talks but he we visited to use adam grant's phrase he was willing to rethink and that's important because now as you as you point out he thinks of apple as part of the crown jewels yeah that's a good point muhammad we talked a little bit earlier about share buybacks because that was a big section in in the report as well we've seen politicians like elizabeth warren some other senators who have kind of come out and said that they're not in favor of share buybacks elizabeth warren on cnbc about a month ago actually called it market manipulation when a company buys back its shares he's a big proponent of it and he uses apple as an example of that why their steak and apple has gotten so much more valuable even as they sold some of it because apple was buying in shares and then he says you know berkshire shareholders also have a bigger piece of the company's future profits because we've been buying back berkshire shares so this is a situation he thinks where the berkshire investors have doubly benefited from that what do you think about stock buybacks and then the political sentiment in washington on it too so i think stock buybacks are part of a well-functioning marketplace and ceos and boards have to decide where to put their liquidity in the interest of of shareholders the problem though and there is a problem becky the problem is we've had highly distorted interest rates and when you have highly distorted interest rates it leads to all sorts of other behaviors that are less consistent with a well-functioning market system so the problem is not buybacks the problem is the great distortion in the fixed income side in the interest rate side because of the over reliance on central banks so the politicians are right in the sense of saying look that something happening on buybacks that shouldn't be going on and that's too much financial engineering but the problem isn't the buybacks themselves the problem is what leads to that distortion shepard smith here thanks for watching cnbc on youtube

Channel: CNBC Television

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Id: JuAtdSdnbkk

Length: 5min 54sec (354 seconds)

Published: Mon Mar 01 2021

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