0:02 You know, I'm a student of history. I've
0:05 read a lot of it. And one of the things
0:07 you learn when you read history is that
0:10 the world is very good at creating
0:12 periods of calm that feel like they will
0:14 last forever.
0:17 People forget that the sea has a tide.
0:19 They forget that storms are not an
0:23 anomaly. They are an inevitability.
0:25 For the better part of a generation,
0:28 we've been sailing on a very calm, very
0:30 predictable sea.
0:34 And it has made us comfortable. It has
0:37 made us complacent. We've started to
0:39 believe that this is the new nature of
0:42 things. I'm here to tell you today that
0:44 the barometer is dropping. The sky is
0:46 changing color. And there is a
0:49 seriousness in the air that I have not
0:52 felt in a very long time.
0:56 Something is about to happen in America.
0:58 This is not a forecast. I don't have a
1:01 crystal ball. But I have been in this
1:04 business for over 80 years. I've seen a
1:06 thing or two. I saw the speculative
1:10 manias of the 60s. I saw the crushing
1:14 inflation of the 70s. I saw the crash of
1:19 1987, the dot bust, the financial crisis
1:21 of 2008.
1:23 They all had different names, different
1:27 triggers, but they all had one thing in
1:30 common. They were preceded by a period
1:32 where people collectively
1:35 started to believe that the fundamental
1:38 rules no longer applied. We are in such
1:41 a period now, and it is my duty as your
1:44 partner to talk about it plainly. Before
1:47 I lay out what I'm seeing, I'd like you
1:50 to do me a favor. in the comments. Just
1:52 write down one word that describes how
1:54 you feel about your financial future
1:57 right now. Are you confident, anxious,
2:00 confused, excited? I want to get a sense
2:03 of the room because the feelings you
2:06 have are part of the story. What is
2:09 happening is not a single event. It's a
2:13 convergence of four powerful currents
2:16 that are pushing us toward a very
2:18 dangerous set of rapids. and many people
2:21 are rowing as fast as they can directly
2:25 into them without even looking up. One,
2:28 the great disconnect. The casino has
2:31 swallowed the factory. For most of my
2:34 life, the stock market, for all its
2:36 daily gyrations, had a tether to
2:39 reality. It was connected, however
2:41 loosely, to the real economy, to the
2:43 factories making things, to the
2:46 railroads moving goods, to the
2:49 businesses selling products to people.
2:51 The price of a stock was supposed to be
2:54 a reflection of the value of the
2:57 underlying business. That tether has
3:01 been frayed to a thread. We have created
3:04 and now celebrate a system where the
3:07 financial economy has become almost
3:09 completely detached from the productive
3:12 economy. The stock market has
3:14 transformed from a place where you
3:16 allocate capital to productive
3:19 enterprises into a giant global casino
3:21 and the chips are moving faster than
3:24 ever. I look at what goes on and it's
3:27 astounding. You have people trading
3:30 options that expire in a few hours. You
3:33 have them buying digital tokens that
3:35 represent nothing, produce nothing, and
3:39 have no intrinsic value. All based on
3:40 the hope that someone else will come
3:44 along and pay more for it tomorrow. You
3:46 have companies with no earnings and no
3:49 plausible path to ever having earnings
3:52 being valued at billions of dollars.
3:56 This is not investing. It is gambling
3:59 pure and simple. The serious thing that
4:01 is happening is that this casino
4:04 mentality has moved from the fringes to
4:07 the very center of our financial life.
4:10 An entire generation is being taught
4:12 that the way to get rich is not by
4:15 building a business or saving your money
4:17 in productive assets, but by guessing
4:20 which lottery ticket is going to get hot
4:22 next week. Now, why is this so
4:25 dangerous? Because a system built on
4:28 speculation is a system built on sand.
4:31 It creates the illusion of wealth
4:35 without creating any actual value. When
4:37 you buy a share of a cryptocurrency, the
4:41 economy is not one bit more productive.
4:44 No new product has been invented. No new
4:46 service has been delivered. Money has
4:49 simply moved from one pocket to another
4:52 with a good chunk of it being scraped
4:54 off by the house.
4:57 When I buy a piece of the BNSF railroad,
5:01 that capital is used to lay new track to
5:04 buy more efficient locomotives to move
5:06 more of America's goods from where
5:09 they're made to where they're needed.
5:11 That is value creation. It makes the
5:14 whole pie bigger. The casino does not
5:18 make the pie bigger. It just re-slices
5:21 it. And in the process, it creates
5:23 enormous instability.
5:26 When the majority of market participants
5:29 are no longer focused on the long-term
5:32 value of a business, but on the
5:35 short-term direction of its stock price,
5:37 the market loses its function as a
5:40 rational allocator of capital. It
5:42 becomes a mood ring for the collective
5:45 psychology of the crowd. And crowds, as
5:48 history has shown us time and again, are
5:51 prone to fits of mania and panic. The
5:54 serious part is that the scale of this
5:56 casino is now so vast that its
5:59 convulsions threaten the real economy.
6:02 When the speculative bubble bursts, and
6:05 it will, because they always do, it will
6:08 not be a contained event. It will wipe
6:11 out the savings of millions of people
6:14 who mistook gambling for investing. It
6:17 will cause a sudden sharp contraction in
6:20 spending. It will force companies to lay
6:23 off real workers who were employed in
6:27 real productive jobs. The casino which
6:30 produced nothing of value will end up
6:32 destroying immense value in the real
6:35 world. That is the great disconnect and
6:38 it is the first sign of the approaching
6:41 storm. Two, the broken compass. We have
6:43 lost our fear of debt. I want you to
6:45 think about a simple business, a corner
6:48 grocery store. The owner works hard,
6:50 serves his customers well, and at the
6:52 end of the year, he's made a small
6:55 profit. He has a choice. He can take
6:58 that profit and use it to pay down the
7:01 loan on his building, strengthening his
7:04 balance sheet. or he can borrow even
7:07 more money to put a fancy new sign out
7:10 front, hoping it will attract more customers.
7:12 customers.
7:15 For a prudent business owner, that
7:18 decision is a balancing act. Debt can be
7:22 a tool, but it is also a risk. It puts a
7:25 claim on your future earnings. It
7:28 reduces your flexibility. It makes you
7:31 vulnerable to a bad month or a bad year.
7:34 A wise owner has a healthy fear of
7:37 taking on too much of it. As a country,
7:41 we have lost that fear. We have lost our
7:43 compass when it comes to debt. And I'm
7:45 not just talking about the government,
7:48 though that's the most glaring example.
7:51 The national debt is a number that is so
7:54 large it numbs the mind. But think of it
7:57 this way. Every single year, our
7:59 government spends well over a trillion
8:03 dollars more than it takes in. A
8:08 trillion dollar. That's a,000 billion.
8:10 We are financing our present by
8:12 mortgaging our future at a rate that has
8:15 no precedent in peace time. The
8:17 politicians will tell you it doesn't
8:19 matter. They'll tell you we can grow our
8:21 way out of it. But for a business to be
8:24 healthy, its earnings must grow faster
8:26 than its debt. Our debt is now growing
8:29 significantly faster than our economy.
8:31 This is the definition of an
8:34 unsustainable path. At some point, the
8:36 world, which has been very happy to lend
8:40 us money for a very long time, will
8:42 start to question our ability or our
8:45 willingness to pay it back in dollars
8:48 that have the same purchasing power. At
8:50 that point, interest rates will have to
8:52 rise dramatically, not because the
8:54 Federal Reserve wants them to, but
8:58 because our lenders will demand it. And
9:00 that will act like a tape break on the
9:04 entire economy. But this isn't just a
9:06 Washington problem. The same addiction
9:08 to debt has filtered down into the
9:11 corporate world and into our homes.
9:14 Companies have borrowed trillions of
9:17 dollars, not necessarily to invest in
9:19 new plants and equipment, but to buy
9:22 back their own stock, often at high
9:24 prices, to goose their earnings per
9:27 share. Their balance sheets are far more
9:30 leveraged and far more fragile than they
9:33 appear. And individuals have followed
9:36 suit. We have normalized the idea of
9:40 living on borrowed money. Car loans that
9:43 last 7 years for a depreciating asset,
9:45 credit card balances that are never paid
9:48 off. The margin of safety, the simple
9:51 idea of spending less than you earn, has
9:53 been replaced by a culture of instant
9:57 gratification financed by debt.
9:59 The serious thing that is about to
10:03 happen is the end of the era of easy money.
10:04 money.
10:07 For 40 years, we have been in a broad
10:09 trend of falling interest rates. That
10:12 trend has ended. We are now in a new
10:15 world, a world where debt has a real
10:19 cost. And that cost is rising. This will
10:22 be a profound shock to a system that has
10:24 been built entirely on the assumption of
10:28 cheap and abundant credit. Businesses
10:30 that were profitable only because their
10:33 borrowing costs were near zero will go
10:36 bankrupt. Homeowners who stretch to buy
10:38 a house with an adjustable rate mortgage
10:41 will face foreclosure.
10:43 And the government itself will find that
10:46 an ever larger portion of its budget is
10:49 consumed not by providing services but
10:51 simply by paying interest to its creditors.
10:53 creditors.
10:55 The crisis will be a crisis of
10:58 deleveraging. It is the painful
11:02 unavoidable process of unwinding decades
11:05 of imprudent borrowing and it will feel
11:07 for many like the world is going in
11:09 reverse. The broken compass has led us
11:12 to this point and the journey back to
11:14 solid ground will be a long and
11:17 difficult one. Three, the illusion of
11:20 control. The Fed's magic wand is losing
11:22 its power. During the financial crisis
11:25 of 2008, I said that our economy was
11:27 like a great athlete who had suffered a
11:30 cardiac arrest. It was flat on the
11:33 floor. The paramedics arrived. That was
11:35 the Federal Reserve and the Treasury.
11:38 And they used extraordinary measures.
11:40 They pumped trillions of dollars into
11:43 the system. They brought the patient
11:46 back to life. It was a necessary and in
11:50 my view a courageous intervention, but
11:53 it came with a long-term side effect. It
11:56 created a powerful illusion. The
11:59 illusion that our economic managers have
12:02 a magic wand. It fostered the belief
12:04 that no matter how reckless the
12:06 behavior, no matter how great the
12:08 crisis, the Fed can always step in,
12:12 print money, and make everything okay.
12:15 This belief often called the Fed put has
12:18 been the dominant psychological force in
12:20 the markets for over a decade. It has
12:23 encouraged risktaking. It has inflated
12:26 asset bubbles. It has severed the link
12:28 between risk and consequence. The
12:31 serious problem we now face is that the
12:36 magic wand is losing its power. Why?
12:38 Because the one thing that ties the
12:41 Fed's hands is inflation.
12:43 When inflation is low, they can print
12:46 money with relative impunity. But when
12:49 inflation is high and persistent, as it
12:51 has been, printing more money is like
12:54 trying to put out a fire with gasoline.
12:57 It only makes the problem worse. This is
13:01 the trap we are now in. The next time we
13:03 have a serious economic or financial
13:06 shock, and we will because that is the
13:09 nature of a market economy, the Fed will
13:12 face an impossible choice.
13:16 If they respond, as they did in 2008
13:19 with massive monetary stimulus to prop
13:21 up asset prices and bail out failing
13:24 institutions, they risk igniting an
13:27 inflationary fire that could destroy the
13:30 currency. If on the other hand they
13:32 prioritize fighting inflation by keeping
13:35 interest rates high and credit tight,
13:37 they risk allowing the financial shock
13:40 to cascade through the system, leading
13:43 to a deep and painful recession. They
13:46 have run out of easy answers. The
13:48 toolkit that seemed so powerful in the
13:51 last crisis is now filled with tools
13:54 that are either ineffective or have
13:57 calamitous side effects. The crisis that
14:01 is coming is not just an economic one.
14:04 It will be a crisis of faith. It will be
14:06 the moment when the public and the
14:08 markets realize that the wizards in
14:12 Washington are not in fact all powerful.
14:14 That there are some problems they cannot
14:16 solve. That there are some consequences
14:19 that cannot be bailed away. When that
14:21 realization dawn, the reaction will not
14:24 be calm. The belief that there is a
14:26 safety net under the tightroppe has
14:29 allowed people to take risks they never
14:31 would have otherwise. When they look
14:34 down and see that the net is gone, the
14:38 panic will be severe. The seriousness of
14:41 this situation cannot be overstated. We
14:43 have built an economic model that
14:47 depends on a perpetual rescue. We are
14:48 about to enter a period where that
14:52 rescue may not be possible. Four, the
14:54 forgotten virtue. Patience has been
14:56 replaced by impatience. The single
14:59 greatest advantage an investor can have
15:02 is a long-term horizon. If you buy a
15:04 piece of a great business and you are
15:06 prepared to hold it for 10, 20, or 30
15:08 years, the day-to-day noise of the
15:11 market is irrelevant. You can let the
15:13 business do its work, compounding your
15:16 capital year after year. Patience is not
15:19 just a virtue in investing. It is the
15:22 cornerstone of wealth creation. This
15:24 virtue is disappearing from American
15:27 life. We have become a society obsessed
15:30 with the short term. Corporate CEOs are
15:33 judged not on their 5-year plan, but on
15:36 their next quarterly earnings report.
15:38 Politicians are judged not on the
15:40 long-term health of the nation, but on
15:43 the latest poll numbers. And investors,
15:46 as we've discussed, are judging their
15:48 success not by the year, but by the
15:50 minute. This chronic impatience is a
15:53 destructive force. It forces corporate
15:56 managers to make foolish decisions. They
15:58 will cut back on vital research and
16:02 development or skimp on customer service
16:04 just to meet an arbitrary earnings
16:06 target for the quarter. They will take
16:10 on huge risks with massive acquisitions,
16:13 hoping for a quick payoff rather than
16:15 doing the slow, hard work of organic
16:18 growth. They are sacrificing the
16:21 long-term health of their business for
16:23 the short-term approval of Wall Street.
16:26 It paralyzes our government. We face
16:29 enormous long-term challenges. Our debt,
16:32 our infrastructure, the education of our
16:34 children. These are problems that
16:37 require long-term thinking and sustained
16:40 investment. But our political system is
16:43 now so focused on the next election
16:46 cycle that it is almost incapable of
16:49 tackling any problem that cannot be
16:51 solved or at least appear to be solved
16:54 in two years. And it is a disaster for
16:57 individual savers. It turns them from
17:00 owners into traders, from investors into
17:03 gamblers. It makes them chase fads and
17:06 sell in panics. It robs them of the one
17:09 great force that can build real wealth,
17:12 the power of compound interest, which
17:15 only works its magic over long stretches
17:18 of time. The serious thing that is
17:21 happening is that our entire system from
17:23 the boardroom to the halls of Congress
17:27 to the individual brokerage account is
17:31 being rewired for shortterm thinking.
17:34 And a system that is optimized for the
17:37 short term is by its very nature fragile.
17:39 fragile.
17:41 It has no resilience.
17:45 It has no margin of safety. It is not
17:49 built to withstand a storm. Conclusion.
17:52 The ship and the captain. So what does
17:54 this all mean? What is this serious
17:57 thing that is about to happen? It is not
18:00 a single event. It is the culmination of
18:03 these four trends. It is the moment when
18:06 a fragile system built on speculation
18:09 and debt with no margin of safety and no
18:12 effective tools to fight a crisis
18:15 finally gets tested by reality. The test
18:19 will come. I do not know the day or the
18:22 hour, but I look at the storm clouds
18:24 gathering and I believe it is coming
18:27 sooner than I once thought. This is not
18:30 a message of despair. I am and always
18:33 will be an incredible optimist about
18:36 America. The productive capacity of this
18:39 country is staggering. The ingenuity of
18:42 its people is limitless. We have faced
18:45 far worse challenges in our history and
18:47 we have always eventually writed the
18:51 ship. But the ship will be tossed and in
18:53 a storm. The fate of the passengers
18:56 depends on their captain. In your
19:01 financial life, you are the captain. You
19:03 cannot control the weather, but you can
19:05 control the seaorthiness of your own
19:09 vessel. This is a time for prudence. It
19:12 is a time for simplicity.
19:14 It is a time to remember the
19:17 fundamental, boring, but timeless rules
19:21 that build real lasting wealth.
19:24 Own productive assets. Don't own speculations.
19:25 speculations.
19:29 Keep a margin of safety. Don't use debt
19:31 to finance your lifestyle.
19:34 Think for the long term. Don't get
19:37 caught up in the daily noise. And above
19:39 all, be patient. The world is about to
19:42 offer you the opportunity to buy the
19:44 best businesses in America at bargain
19:47 prices. You only get that chance when
19:50 there is fear in the air. Prepare
19:53 yourself now. Get your own financial
19:56 house in order so that when that fear
19:59 arrives, you will not be a victim. You
20:02 will be a provider of liquidity. You
20:04 will be the one with the calm head and
20:06 the steady hand. You will be the one
20:09 ready to act. Something serious is about
20:12 to happen. But for the prepared, it will
20:14 not be a crisis. It will be an
Chrome Extension