I did a question-and-answer session with Canadian newspaper La Presse this week. Its edition will be published in French, so here's the English version.
Unprecedented amount of debt, high unemployment, cities going bankrupt. A lot of business stories about the U.S. tend to be negative. Yet, you seem to be critical of this general consensus. What are we missing?
Excessive debt is always a problem because it takes away options and leaves you beholden to the past. But I think people ignore how much progress we've made on this front. Total debt, including all government and private debt, as a share of gross domestic product has declined every year since 2008. Household debt payments as a share of income are at the lowest level since the early 1980s. We're in the middle of one of the largest debt-deleveragings of all time, and that sets us up for a more stable future. It's ironic -- but totally predictable -- that most people didn't start worrying about our economy's debt problem until it began shrinking.
American business has so much going for it right now. Businesses are more profitable than ever. Domestic energy-production is now increasing for the first time in three decades. What does that do to our future? I don't know, but I think it'll be big. It's already pushed the price of natural gas to decade lows. Combine that with surging wages throughout the developing world, and American manufacturing is more competitive than it's been in years. These trends are nearly the opposite of what we faced a decade ago.
Economies move in cycles. The 1920s boomed. The 1930s were a disaster. The 1950s and 1960s were great. The 1970s were pretty rough. The 1980s and 1990s were glorious. The 2000s were terrible, but that just puts us closer to the next expansion. I think we're a lot closer to that expansion than many think.
Ask any student graduating from any university today and they'll likely tell you that the American Century is over, and that China is about to have its moment in the spotlight. Do you agree?
I agree to a certain extent. But ask those students where they'd rather live -- China or America -- and I bet 99 out of 100 would choose America. That goes beyond cultural and language barriers. Adjusted for purchasing-power parity, America is more than five times richer than China on a per-capita basis.
And while America is growing slower, we are still home to innovation. Apple products say "Designed in California, Assembled in China," on the back. Ask those students which part of the product cycle they want to be involved with, and I think you know what answer you'd get.
China also has severe demographic problems stemming from its one-child policy. Its working-age population is already shrinking, while America's is growing. The effect that will have on future growth isn't appreciated as much as it should be.
I don't think there's any doubt that average living standards in Asia will increase much more over the next few decades than they will in America. In that sense, the 21st century might belong to Asia. And it could transition into an innovator faster than I imagine. But I think America will be the best place in the world to live for decades to come.
You seem to be drawn to people who think against the herd, like Charlie Munger, Mohnish Pabrai, Burton Malkiel, etc. When and how did you first become interested in them and their work?
I became interested in them after realizing that they are usually right, while the herd is usually wrong. Most investors say they're contrarians, but I think very few truly are.
If you want to become a great basketball player, you should study Michael Jordan. If you want to become a great golfer, study Tiger Woods. And if you want to become a great investor, you should study people like Buffett, Munger, and Pabrai. People pay too much attention to advice given by people who have not been successful in the field they're giving advice on.
We hear a lot about a new wave of manufacturing in the U.S. Do you think that will be a major phenomenon going forward?
Yes! It's driven by three factors. One, shipping costs between Asia and America are much higher than they were in the past. Two, wages throughout most of Asia have been rising faster than productivity, while American wages have been facing the opposite phenomenon. Three, natural gas now costs several times less in America than it does in Europe or parts of Asia. Add these up, and you get a competitive advantage that America hasn't seen in years.
The one caveat: I don't know what it will do to job creation. Today's manufacturing is highly automated, unlike the 1950s-1970s manufacturing boom that was labor-intensive. Manufacturing output over the last three decades has actually done well, even though manufacturing employment has dropped like a rock. I think it's likely to be the same going forward.
What do you read (online and newspapers)?
The daily routine is: Wall Street Journal, New York Times, Financial Times, Washington Post, Los Angeles Times, Bloomberg, Reuters, and about a dozen blogs I follow closely. Calculated Risk is a great one. Ezra Klein is sharp and knows more about economic policy than almost anyone. The blog Farnam Street is a great resource. I spend a lot of time digging through economic data and academic studies. And at any given time I'm reading several books. Right now I'm reading the biography of Joseph Kennedy by David Nasaw, The Better Angels of our Nature by Steven Pinker, and The Quest by Daniel Yergin.
I also read old news because it helps you see how people interpreted upcoming events before they actually happened. Reading the investment section of newspapers from 1999 is fascinating and teaches you more about the mentality of bubbles than anything else. And I go out of my way to read things I know I'm going to disagree with, because it guards against confirmation bias.
Is there a book that stands out for you that helped shape the way you think?
I thought the biggest story of the financial crisis was that so few people (including me) saw it coming. I wanted to learn how to make better predictions, which led to me to the book Expert Political Judgment by Philip Tetlock. It's an amazing book, laying out a study Tetlock performed over several years on experts' ability to predict political events, notably the collapse of the Soviet Union.
The short summary is: The vast majority of experts can't predict the future any better than a coffee pot. Worse, most experts don't even know how bad they are at forecasting, or at least they don't care, since the media doesn't hold them accountable.
The book changed how I think about financial media, which is dominated by predictions. I've grown much more skeptical of forecasts. The economy is a machine with trillions of moving parts, but we pretend it's a simple device, like a lever. That leads most forecasters astray. The global economy is just way too complicated to allow us to say, "If we do X, Y will happen." We have no idea what will happen.
Tetlock's findings show that those who are most certain of their views tend to be the most wrong, while those who are quick to change their minds when they come across new information have a decent record. I try to keep that in mind. Those who say something is "certain" to happen should probably be ignored. Someone who says "there's a 60% chance of this happening" is more likely to be grounded in reality.
