This article was originally published by Tyler Durden at ZeroHedge. 

We already touched on two of the more colorful exchanges from Saturday’s Berkshire annual videoconference, both of which incidentally starred the traditionally far more outspoken Charlie Munger, who first crushed a generation’s monetary dreams saying that today’s Millennials will have “a hell of a time getting rich compared to our generation”, and then infuriated tens of millions of crypto fans and diamond hands (such as Dan Loeb) when he said that “the whole damn development” of cryptocurrencies “is disgusting and contrary to the interests of civilization.”

Yet while those two incidents may prompt the most Monday morning watercooler talk, what was most relevant from a macro and markets standpoint was Buffett’s observation of something the Fed and Treasury are terrified to admit: that a tidal wave of inflation has been unleashed upon the US and it’s only getting worse.

Speaking to Berkshire’s millions of shareholders on Saturday, Buffett said that he was surprised by the “red hot” US economic rebound and warned the company was being hit by inflationary pressures.

“We’re seeing very substantial inflation,” the 90-year-old billionaire who apparently does not have a Fed charge card, said in his nearly 6-hour long address to investors. But it’s what he said that was especially ominous:  “It’s very interesting. We’re raising prices. People are raising prices to us and it’s being accepted.”

Why does this matter? Because the ability to pass on price increases and have them stick, means the surge in prices will not be transitory, no matter how many times the Biden admin, the Fed, or the Treasury lie and vow the opposite.

Buffett’s comments came one day after the US revealed that household incomes rose by the most in recorded history in March as the latest round of Biden stimmies hit bank accounts.

This has also pushed the total amount of government transfer payments to a record 34%. That’s right: a third of all US household income is now from the state. Marx would be proud.

The surge in income which for now has resulted in record excess savings of roughly $2 trillion, has sent reverberations throughout financial markets, with investors’ inflation expectations over the next decade rising to an eight-year high.

“It just won’t stop,” Buffett added. “People have money in their pocket and they’ll pay the higher prices… There’s more inflation going on that people would have anticipated six months ago or thereabouts” he added.

We urge readers to go over the full exchange because the world Buffett lives in and the one populated by the clueless career economists of the Fed are apparently totally different:

BECKY QUICK: I will ask this question from Chris Freed from Philadelphia. And whoever wants to take this on stage, “From raw material purchases by Berkshire subsidiaries, are you seeing signs of inflation beginning to increase?”

WARREN BUFFETT: Let me answer that, then Greg can get more into that. We’re seeing very substantial inflation – it’s very interesting. I mean, we’re raising prices. People are raising prices to us. And it’s being accepted. Take home-building. I mean, you know, the cost of– we’ve got nine home builders in addition to our manufactured housing operation, which is the largest in the country.

So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day, they’re going up. And there hasn’t yet been because the wage– the wage stuff follows. I mean, the– the UAW writes a three-year contract, we got a three-year contract.

But if you’re buying steel at General Motors or someplace, you’re paying more every day. So it’s an economy, really– it’s red hot. I mean, and we weren’t expecting it. I mean, all our companies, when they thought when they were allowed to go back to work at, well, various operations, we closed the furniture stores, I mentioned.

You know, they were closed for six weeks or so on average. And they didn’t know what was going to happen when they opened. And they can’t stop people from buying things. And we can’t deliver them. They say, well, that’s OK because nobody else can deliver them either, and we’ll wait for three months or something of the sort.

The backlog grows, and then we thought it would end when the $600– the payments ended, and I think around August of last year, it just kept going. And it keeps going and it keeps going and it keeps going. And I get the figures. Every week, we go over, day by day, what happened at the three different stores in Chicago and Kansas City and Dallas.

And it just won’t stop. People have money in their pocket, and they pay the higher prices. And when corporate prices go up in a month or two– and that was the price increase for April 1– our costs are going up, supply chain’s all screwed up for all kinds of people. But it’s a buy– it’s almost a buying frenzy, except certain areas, you can’t buy at.

You know, you really can’t buy international air travel. And so the money is being diverted from a little– some piece of the economy into the rest. And everybody’s got more cash in their pocket than– except for, meanwhile, it’s a terrible situation for a percentage of the people.

I haven’t worn a suit for a year, practically. And that means that the dry cleaners just went out of business. I mean, nobody’s bringing in suits to get dry cleaned, and nobody’s bringing in white shirts the place where my wife goes.

The small business person, if you didn’t have takeout and delivery services for restaurants, you got killed. On the other hand, if you’ve got takeout facilities, then, same-store sales at Dairy Queen are up a whole lot, and they adapted. But it is not a price-sensitive economy right now in the least. And I don’t know exactly how– what shows up in different price indices. But there’s more inflation going on than– quite a bit more inflation going on than people would have anticipated just six months ago or thereabouts.

CHARLIE MUNGER: Yeah, and there’s one very intelligent man who thinks it’s dangerous. And that’s just the start.

WARREN BUFFETT: Greg, you probably are in a good position to comment.

GREG ABEL: Yeah, well, Warren, I think you touched on it. When we look at steel prices, timber prices, any petroleum input, you know, fundamentally there’s pressure on those raw materials. I do think something you’ve touched someone, Warren, and it goes really back to the raw materials.

There’s a scarcity of product right now, of certain raw materials. It’s impacting price and the ability to deliver the end product but, you know, that scarcity factor is also real out there right now, as our businesses address that challenge. And it may be the sum of that’s contribute– or arisen from the storm we previously discussed in Texas. When you take down that many petrochemical plants in one state that the rest of the country is very dependent upon it, we’re seeing it flow through both on price, but overall in scarcity of product, which obviously go together. But there’s challenges, that’s for sure.

Buffett’s admission was also remarkable because it was in opposition to all the official manure spoon-fed to the gullible peasants by the President and his economic henchmen (or is that sexist: perhaps henchpeople is more apt?). Case in point, today former Fed chair and current Treasury Secretary Janet Yellen said that Biden’s multi-trillion economic plan is unlikely to create inflation pressure in the U.S. because the boost to demand will be spread over a decade.

“I don’t believe that inflation will be an issue. But if it becomes an issue, we have tools to address it,” Yellen said Sunday on NBC’s leftist Meet the Press show. “It’s spread out quite evenly over eight to 10 years. So, the boost to demand is moderate,” she said of the proposed spending.

Yellen also said the U.S. has the “fiscal space” to make investments in its economy, with interest rates low and likely to remain so, but over the long haul, budget deficits need to be “contained.”

In other words, all those soaring prices, including the Costco shrinkflation seeking to mask a 14% price increase with small offerings… well, just ignore that for a few more years until the “transitory” period ends. Assuming it ends, of course. It didn’t quite end in the 1970s when inflation was also supposed to be transitory.

Yellen said that while the administration needs “fiscal space to be able to address” emergencies like the pandemic, it needs to do so with a long-term plan in mind. “We don’t want to use up all of that fiscal space, and over the long-run deficits need to be contained to keep our federal finances on a sustainable basis,” she said.

Asked about the proposed tax increases that would come with Biden’s spending plan, Yellen focused on the U.S. proposal for a global minimum corporate tax, and efforts to clamp down on tax loopholes in the U.S. “An important way of paying for this is increasing tax compliance,” she said. “It’s estimated that underpayment of taxes that are really due is costing us, the federal government, about $7 trillion over a decade.”

While Yellen touched on rising taxes, there were several other items she refused to touch upon:

How about the increased
– deficits
– national debt
– resulting #QuantitativeEasing
– resulting reliance on China to buy our debt
– increased taxes resulting in 1.1MM lost jobs
– stagnant econ growth

Do any of those worry #Yellen https://t.co/slL66279lm

— Peter J. Dawson (@PeterDawsonUSA) May 2, 2021

It wasn’t just Yellen lying to the people: another top Biden administration economic adviser said inflation now apparent in certain pockets of the economy is “transitory” as the nation exits the pandemic. Cecilia Rouse, chair of the White House Council of Economic Advisers, said supply chain issues and labor market shortages are “bumps along the way” to recovery.

There’s no sense for now that these price increases are becoming “de-anchored,” she said on “Fox News Sunday,” while promising to remain vigilant on inflation pressures.

“For the time being we expect at most transitory inflation, that is what we expect coming out of a big recession,” she said. It wasn’t clear what would happen when her expectation was proven to be wrong.

Yellen and Rouse spoke following last week’s unveiling of the latest economic plan from the Biden administration, which is proposing a combination of $1.8 trillion in spending and tax credits for areas such as education, child care, and paid family and medical leave. This comes on top of almost $2.25 trillion in infrastructure, home health care and other outlays that the administration proposed at the end of March, not to mention the $5 trillion that the government has injected into the economy through the three pandemic relief packages passed by Congress during the past 14 months.

In short, we are looking at $10 trillion in new government handouts in the coming years, give or take a few trillion.

None of this matters to the “big man” himself – and no, not the nearly 80-year-old Biden, of course, who is merely a puppet for whoever writes the lines into his teleprompter – but Fed Chair Jerome Powell, who shrugged off such concerns last week, telling reporters that the reopening of the economy may lead to a single episode of price increases, but not a long-running bout of inflation.

Which, of course, is a lie and for what is really coming please re-read “We Are At The Early Stage Of The Biggest Cobra Effect In The History Of Economics.”

* * *

Finally, for those who missed it, here are the main highlights from Berkshire’s nearly 6 hour Saturday tour de force annual meeting, (courtesy of Bloomberg):

• SPACs, Robinhood, and day trading. We got plenty of opinions from Buffett and Munger on these trends that have gripped the markets over the past year. Buffett called the SPAC boom a “killer” when it comes to creating more competition for Berkshire’s dealmaking desires. But he acknowledged that the stock market has become more of a casino with all the day trading and it creates its own reality for a while until it all blows up. On Robinhood, Buffett acknowledged that gambling isn’t bad but taking advantage of that instinct isn’t the most admirable part of society.
• Buffett made some big moves last year, dumping airline stocks and paring back bank bets. He acknowledged today that airlines could have had a different outcome on federal relief if they had a super-rich company as a top shareholder, but even then, he wouldn’t buy airlines given the slump in international travel.
• Buffett admitted to a few missteps over the past year. Haven, the health care venture, failed eventually and Buffett said that they couldn’t really tackle the “tapeworm” of health care. He added that last year, amid the airline sales, wasn’t Berkshire’s greatest moment. Plus, it was a mistake to sell some Apple stock last year, he added.
• We only got a potential new clue about succession. At one point, Charlie Munger mentioned that Greg Abel would maintain the culture at Berkshire. Abel has been seen as the most likely successor — he’s younger and controls a lot of Berkshire businesses. But no successor has been publicly announced, so that little comment might be picked up by a few investors eager to know who will take over.
• Two shareholder proposals — one on climate change and one on diversity — got a lot of attention ahead of the meeting with proxy advisers Glass Lewis and ISS pushing back against some of Berkshire’s views. But both of those ended up being voted down at the end of the meeting.

And here is a detailed breakdown courtesy of @TheRationalWalk

Starting a thread for the Berkshire Hathaway 2021 annual meeting which has just started. $BRKA $BRKB

Abel and Jain are present on stage, although off to the side from Buffett and Munger.

Buffett is spending a few minutes talking about Jain and Abel to introduce them to the shareholders.

Very good to have all of them available for Q&A on the same stage.

Buffett is pointing out how the accounting rule change a few years ago distorted quarterly (and annual) earnings by including unrealized gains and losses from investments in net income.

This makes periodic earnings swing dramatically and misleads many investors.

Buffett has a slide of the top 20 companies in the world by market cap, 5 of the top 6 U.S. based which led into a pep talk on the United States, which he does so well.

“The system has worked unbelievably well.”

Now Buffett puts up a slide of the top 20 companies in the world from 1989. None of the 20 from 30 years ago are on the present list. Zero. And 13 of the 20 were from Japan!

The top company in 1989 had a market cap of $104 billion – Industrial Bank of Japan.

Buffett is directing this very good history lesson at new investors, but most will just see an old man talking about Henry Ford and disregard his statements. Too bad for them.

Buffett has a list of auto companies from the early 20th century that eventually went bust. Dozens of auto companies just starting with the letters “Ma”. Thousands of entrants. Incredible future. Most failed.

“It’s not as easy at it sounds.”

Referring to entering new and exciting markets that will change the world.

First question asks why Buffett was defensive early in the pandemic. A lot of hindsight bias in that question. Of course it wasn’t the right call … given the history that played out.

Buffett talks about his role controlling risk at Berkshire.

Buffett implies that if Berkshire was still in the airlines, they might not have received the aid that they did. That’s very interesting. He’s implying that Berkshire’s exit from the airlines in some way facilitated the fact that government bailed them out.

Next question is why Berkshire didn’t deploy more cash at the lows in March 2020. More hindsight bias in that question …

Interestingly, Buffett notes that the $20 billion minimum cash balance is going to be increased given Berkshire’s current size.

The day before the Fed acted, Buffett thinks that even Berkshire could not have issued debt. Markets were closed. He’s praising Powell for acting, praising Congress for acting. “It did the job.”

Buffett did not think that it was a “sure thing” that government would act as they did. He was unwilling to COUNT on government acting as they did in March 2020. He won’t rely on the kindness of anyone. And that’s how I like it, and I suspect most shareholders agree.

Munger says that the questioner is “out of their mind” to think that Berkshire could bottom tick the market in March 2020.

Q: Should long term Berkshire shareholders diversify into an index fund?

A: Munger prefers holding Berkshire to holding an index fund. Buffett recommends the S&P 500 index fund, has never recommended Berkshire to anyone.

Buffett “likes Berkshire” but suggests that people who don’t know anything about stocks or no “special feelings” about Berkshire should buy the S&P 500 index.

Buffett is going out of his way to not talk up Berkshire, which is fine, but I question the idea of suggesting the S&P 500 index at current valuations. I don’t think that does anyone any favors.

In the context of dollar cost averaging into index over a long lifetime, S&P 500 is OK, but the question was from a longtime shareholder asking if he should diversify into an index. It would seem nuts to sell BRK to buy the S&P 500, in my opinion. Munger seems to agree.

BREAKING: Munger would prefer to have a son-in-law who works at Chevron rather than as an English professor at Swarthmore.

Buffett doesn’t use the word “asinine” often, but tears into the ESG proposals which I assume will be discussed more fully during the formal shareholder meeting when the matter comes up for a vote.

“We don’t do things just because we have a department of this or a department of that … what’s important is what we are doing at BHE and the railroad…”

Buffett is really fired up talking about renewables and how you can’t turn off the coal plant until you have transmission from wind power to where it is actually used.

I can tell he’s pissed about Berkshire getting a bum rap on the environment.

Buffett turns over the question to Abel who has slides prepared regarding Berkshire’s environmental record at the energy group. Goes back to a 2007 conference where he discussed climate change, policy, innovation, etc… These guys are prepared for the ESG proposals…

Buffett asks “How many other energy companies were there” when Abel talks about a group of companies that made commitments regarding the Paris climate agreement. Abel says “none”.

Buffett: “We’d spend $100 billion on infrastructure” referencing Biden’s speech on Wednesday stating that we need more infrastructure spending.

If we get a 10% return, I’m all for it as well.

Good question on prospects for insurance when Buffett and Jain are no longer involved. Should Berkshire then focus on short-tail lines?

Jain talks about pricing for the unknowns unknowns – a good answer, but not really addressing succession.

Buffett: “We are willing to lose $10 billion in a single event” if paid appropriately for taking on a risk.

Sounds like a big number but not relative to Berkshire’s current size.

“Warren and I don’t have to agree on every damn thing we do.”

Charlie’s answer when asked about differences of opinion between him and Buffett on Costco and Wells Fargo.

Having Jain and Abel on stage interacting with each other is quite valuable for shareholders.

“In three more years, Charlie will be aging at 1% per year. No one is aging less than Charlie.”

Very funny, Warren …

Jain talking about GEICO and Progressive – very candid about Progressive as a formidable competitor and the relative advantages of GEICO and Progressive.

I can tell Jain doesn’t engage in BS. At all.

Buffett talking about $AAPL. Munger thought that Buffett selling a little was a mistake.

Charlie: “Yes”

Buffett is talking about how Apple products are indispensable to customers.

He’s right about some people picking their phone over a car if they had to choose between the two.

People are addicted to their damn phones.

Buffett talking about how interest rates are like financial gravity when asked about stock valuations.

Buffett looking for a clipping from a … paper WSJ … noting that the government sold 4 week t-bills at an average price of 100.000000. Free money for Uncle Sam.

Buffett notes that there has been an incredible change in anything that produces money because the risk free rate is now zero.

And of course he’s right. But for how long will this last? Is it “safe” to price stocks as if the risk free rate will be zero forever?

“The most interesting movie we have ever seen.”

Buffett characterizing the current economic environment.

Buffett: Low interest rates reduce the value of float substantially but Berkshire has options for investing that others don’t have.

As noted earlier today, Buffett shuns fixed income securities for this very reason.

Buffett notes that most SPACs have a two year limit for deploying cash. If you have a gun to your head, then you’ll buy something.

The meeting is half over and no Bitcoin, Dogecoin, Elon, or Crypto questions yet, unless I missed it.

Buffett says that he has roughly $70-80 billion that he would love to put to work.

$20 billion is not the minimum cash level anymore, as he alluded to earlier. It is probably double of that or more, but he has not specified.

Charlie: “Bernie Sanders has won.” Referring to the millennials having trouble rising as far as earlier generations. Um….

Buffett defends the logic of repurchases vs. dividends as a way of cashing out shareholders who want cash, leaving the rest of us alone to continue compounding.

Tax efficiently, I might add.

Munger: Critics are bonkers.

Amen.

I feel very good about not receiving a surprise dividend from Berkshire anytime soon.

Which I suspect will remain the case as long as Buffett and Munger are around since they don’t want to pay the taxes any more than I do.

Buffett stresses that he doesn’t speak for Berkshire when providing his personal views on taxes.

He punts on tax questions. Although he certainly has spoken in the past on taxes at prior meetings.

I like the new policy.

Munger: “I wouldn’t move across the street to save my children $500 million in taxes.”

But … “Who in the hell would drive out the rich people?”

The government owns “Berkshire Class AA stock”. They can take a percentage of earnings without owning any of the company. Indeed.

Buffett thinks that his wealth will accomplish more utility in private philanthropy run by smart people. It won’t make a “damn bit of difference” if it goes to the Federal government. I agree.

I suspect (or at least hope) that Buffett has spoken to the President about tax policy, especially the folly of even thinking about thinking about taxing *unrealized* gains annually, one of the more bonkers ideas to ever be proposed in Washington. Truly nuts.

Buffett: Valuation for Kansas City Southern deal would not be happening without interest rates at current levels. A combination would have a small impact on BNSF and Union Pacific.

Buffett: Biggest single “risk factor” never appearing in a company filing is a CEO who is personable and everyone likes but doesn’t know what he or she is doing.

CRYPTO/BITCOIN QUESTION!!!

Buffett dodges the question. He doesn’t want 400,000 people mad at him and 2 people happy.

Charlie: “You’re waving a red flag at a bull.” Rant follows on bitcoin and other things invented out of thin air … Disgusting, contrary to the interests of civilization…

Q: Why is BRK’s proposal for TX grid better than Musk’s proposal?

Abel: BRK’s proposal is the best they could come up with. If Elon’s proposal is better, then Texas should pursue it. Notes that battery solution isn’t as robust in terms of duration of power supplied.

Buffett: We know what we can do for TX grid. If someone can provide a solution cheaper and faster, they should do it.

Notes that Berkshire is backing proposal with $4 billion penalty if they fail to deliver.

Q for Ajit: Would you underwrite an insurance policy for Elon Musk’s mission to Mars?

“No thank you, I will pass.”

Buffett: Depends on the premium. And on whether Elon is on the mission or not. Skin in the game.

Ajit: “I would be very concerned about writing an insurance policy with Elon Musk on the other side.”

Q: Why aren’t Ted and Todd available to answer questions?

Buffett: Why would we make Ted and Todd available to talk stocks and share ideas with competitors?

Munger is convinced that China will allow companies to flourish. They “changed communism” because they didn’t want to stay poor. A remarkable change coming from such a place. And it has worked like gangbusters. Munger very complimentary.

This will trigger many people.

Q:What happened to the joint health care initiative with Amazon and J.P. Morgan?

Buffett: We learned more about health care in decentralized Berkshire subsidiaries and is one place where centralization could save some real money.

Very hard to change the overall system.

Buffett notes that when companies pay healthcare costs for employees, its an abstraction to employees. They don’t realize that they are really paying in the form of lower wages. And they like that.

Munger: “No kidding”

Buffett notes that U.S. pays 17% of GDP for healthcare while no other major country pays more than 11% yet we get poorer results.

Rational Walk: “No kidding”

Buffett on the failure of the joint healthcare initiative with J.P. Morgan and Amazon:

“We were fighting a tapeworm, and the tapeworm won.”

Question: What do Jain and Abel read on a daily basis?

90% of Ajit’s reading is related to insurance. Abel focuses on the operating businesses he’s in charge of.

Blocking and tackling.

Buffett: Nothing illegal or immoral about gambling on Robinhood but you can’t build a society around it. Not admirable. Will read prospectus.

Munger: “Waving a red flag at a bull.” Godawful. Deeply wrong. State lotteries: States pushed aside mafia in numbers game.

Q: Signs of inflation in subsidiaries?

Buffett: Very substantial. We are raising prices. People are raising prices to us. It’s being accepted. Take homebuilding. Cost up up up. Every day. cc @federalreserve

Buffett is clearly seeing inflation pressure. Doesn’t sound like he thinks it is “transitory”.

Who do you believe? Warren Buffett or Jay Powell and his army of phd economists?

I am paraphrasing, but the transcript will be posted soon, the video will be available, and I’d encourage everyone to read his statements on cost pressures verbatim.

“There’s more inflation going on that people would have anticipated six months ago or thereabouts.”

Listening to that exchange just now makes me want to take out a large thirty year fixed rate mortgage as soon as possible even if I might be paying a high price for a property.

Buffett notes that while rich people can change states relatively easily, a business with plants cannot change so quickly and must be very careful about the pension deficits in various jurisdictions.

Q: Biggest lesson over the past year?

Buffett: “Listen more to Charlie.”

Munger: “We are in uncharted territory.”

Buffett talks about the long term prospects for Berkshire over the next many decades, etc.

No break between the 3 1/2 hour Q&A session and formal meeting. Buffett is 90. Munger is 97.

The formal meeting is a foregone conclusion in terms of the outcome of the two shareholder proposals so I’ll conclude this thread here.

The full annual meeting is here.