I sat down to speak with value investor Mohnish Pabrai last week. Pabrai might not be a household name, but his results place him as one of the most successful investors of the past decade. He's worth listening too.
I asked Pabrai what he thought about the fiscal cliff. He made some great points, which eventually became a conversation about how investors should think about macroeconomic issues in general. It's often more complicated than you might think. Pabrai's example: Real unemployment is much higher than a few years ago, but auto sales are actually doing well.
Here's what else he had to say. (Transcript follows.)
Mohnish Pabrai: I think the fiscal cliff for the most part is a non-event. I think that there's a lot of posturing between the parties, but in the end both parties have so much to lose for that to actually go into effect. All kinds of voters, Republicans and Democrats, will be quite upset with them. So I think in the end they will come to some sort of compromise or kick the can down the road or something along the lines which will take care of the issue. So it may not happen by Dec. 31, but I think it will happen early part of next year, if that doesn't happen by the end of the year.
So when you look at macro factors, I would say that these human factors can trump a lot of things like the fiscal cliff and so on. So I think the fiscal cliff is irrelevant in the broad scheme of things. Unemployment is more relevant, but I think you have to get down to specific businesses.
So let's take, for example, the auto industry in the United States. So in the salad days of 2006 and 2007, U.S. auto sales were in the 16-, 17-million-cars-a-year range. And then during the financial crisis, they went down to about 10 million cars. They went pretty low, and of course GM and Ford -- I'm sorry, GM and Chrysler -- got restructured. And if you look at the auto industry today, so in 2012, volumes are going to approach 15 million -- pretty darn close to the volumes that were in place in 2006 and 2007.
Real unemployment is much higher than 8%; we're not counting the people who have given up and all that. Real unemployment is heavily in the double digits. So even though we have a real unemployment picture which is quite bad, autos seem to be transcending that trend, whereas one would think that autos are tied to the health of the economy.
But there is another factor that affects it, and probably affects it more than the unemployment rate, and that is the average age of a car on the American roads is now 11 years. That is, I think, an all-time record. And so, we have such an old fleet, and those years where sales were so low, when people had deferred purchases, it becomes really expensive to repair old cars. And interest rates are low. So there are lots of incentives for even someone who is having a tough time to trade in the beater and get a small Honda Civic or something, and just take away the repairs. So we are seeing autos, for example, rebound, even though the economy is not super healthy. We are seeing housing rebound. And again, these rebounds are happening because of the long period where very little happened and there was very little demand.
So I would say: Sometimes the headline numbers of unemployment rates, etc., can be trumped by more salient factors.