Transcripts For CNBC Squawk Box 20170508

Inaugurated on sunday next on the agenda, in france, two rounds of parliamentary elections in june. We should mention the jueuro jumping to sixmonth highs. Youre looking at european markets right now, across the board, they are down. In large part, they had risen, of course, on friday in expectation ever this news. In asia, japan rising 2. 3 overnight. The hang seng was slightly higher. U. S. Equity futures up right right now. Standing basically, marginally down about 23 points. S p 500 call it virtually on the nasdaq off by a point. In corporate news, sources telling cnbc that comcast and Charter Communications plan to announce a Wireless Partnership as soon as today. The partnership is aimed at cutting costs, as well as speeding up entry into the wireless market. As part of the agreement, Neither Company will make any deals in the Wireless World for the next year without the others consent. The move is renewing speculation that the two cable giants could make a play for a wireless carrier company. The Cable Company has been looking at wireless to retain existing customers, as well as make their bundles more attractive to new customers. A quadruple play, i guess it would be. Wireless. Yeah, it makes it harder to believe that after this if it would be the way theyre talking about, makes it harder to believe there could be a combination with verizon which is the the partner that comcast has. But to the extent that theres speth las veg speculation that they could potentialmly merge. But comcast is using their back cone, thats what time did you get in . I got in at about 8 00. That just perfect for. You. Perfect. Good enough to see the kids and to give them little dolls of warren wuf fetwar Warren Buffett. I went and bought dolls of Warren Buffett. To becky got with the doll Warren Buffett but the real thing. These arent voodoo dolls right . No, i dont know the secret millionaire ones, right . They talk, they have a dvd. Were going to watch the cartoons and my kids are going to learn about money from Warren Buffett. Warren, im going to see if it works. Im going to stick a needle into one of these. See if you feel anything. I actually dont have one. But im going to try that. How much do you get for each i bet you he makes money on each one of those, right . You can never have enough, right, warren. Youll get the voodoo doll joke. Ive got a special one for you. Starting on you early, warren. I know. Youre vulnerable. All right. Well, guys, lets jump into this right now with both feet. Warren buffett is our guest this morning, hes the chairman and ceo of Berkshire Hathaway, this is his first interview since sitting down he spoke to 40,000 or so berkshire shareholders over the weekend just across the street here. Warren, thank you very much for joining us this morning. Ive been kind of thinking back, its been years now since the annual meeting. And the annual meeting has changed over this course of time. What did you think . People continue to have fun. Its half mardi gras and half annual meeting when they come, and we see thousands them in the steakhouse last night. A couple hundred there, theyre all smiling. You know, there were planes that didnt fly, a few things, but a few inconveniences, but they had fun. And they meet a lot of people that that they saw in the previous year. As a matter of fact, we went to the steakhouse, the directors all went there, the same guy that picked up our check has probably picked up for ten straight years. Im trying to today so that you can buy him lunch or that you can show up and get another free lunch . Everybody is in a good mood. Theyre clapping at the steakhouse. And they come because they expect to have a good time there. And we try not to disappointment them. Well, we watched a lot of Different Things and heard so much from the q a this weekend. I was trying to figure out a few myself. One of the themes that stuck out with me is technology. And how much that was discussed this weekend. For a guy who claims hes not really a technology guy, in fact doesnt even own a smartphone. You spent a lot of time talking about Technology Investments that you made or didnt make that you missed out on. I was thinking in particular about apple. You that talked quite a bit about why you got into that. Ibm. Why youre selling some of that stake. But you also talked about of the Companies Like google where you said you missed it. Maybe you can tell us about that. Well, i did miss it. Charlie brought up the fact that we missed it, too. Google, i should have had some insight into it. Here we saw value at that time, i have no idea what we were paying for put now. We were paying 10 or 12 per put. And were going to keep seeing that. I should have had more insight into that. Whether bing was going to come along or other people were going to take away the market, thats another question. Whether you had source of a first user advantage would be what would prevail. And theres a lot of technology with it. Somebody could have come along with a better technological product that i would not have had insights into that. I think laser surgery or Something Like that, i think it may have sold for 60 or 70 bucks or something. Thats completely omaha. I dont know what it brings now. Just imagine having something every time theres a click on a Cash Register somewhere out in california. It was an an extraordinary business and it had some aspects of a snarl anomaly. Its very easy for me when i go to a computer. Ive worked with google before. But im looking for information for the annual report. I used to have to mail away to federal agencies or go to the public library. Now, i can get it in ten seconds. So it improves to be valuable advice which the other guy pays for. The user of the computer doesnt. The answer is, we missed it. Sergei and larry came to you. And actually eric did, too, i liked them. When you say you missed it, that suggests its now at a valuation you understand the company, its now a valuation that doesnt make sense to you. Why dont you just buy it now . If i was forced to buy it id buy it, same way with amazon. I can just tell you psychologically, its harder when you looked at it in the first place and passed. And then buy it, it cost a lot of people money at berkshire. And i just said if it ever gets back there, ill buy it. Thats a terrible way to think. Train what is left the station . Iyeah. How come you dont feel about that about shares at apple . How come you feel thats a different story . Well, the shares were a lot more reasonable. Apple didnt have to do as a lot better in the future than they did over a period of time. Youre paying for the future more. That may be more than justified. But apple, i wouldnt say understand that google now perhaps or amazon now certainly would have been five years ago. Its amazing where apple or yeah, apple ended up with the consumer. I can very easily determine the Competitive Position of apple now. And whos trying to chase them. And how easy it is to chase them. We happen to be well situated in terms of massive Home Furnishing stores. And i can learn very easily how consumers react to Different Things there. Probably easier than i can trying to pick up whats is really happening at amazon at any given time. So, you use your research at the Nebraska Furniture Mart to tell you that consumers prefer apple over samsung . What type of thing are you using . Well, interesting thing is if you come in to buy a tv set at furniture mart, price is extremely important. Now, obviously, picture, theres all those great pictures sitting up there. You can have samsung, all of these different ones. And if you put on a sale and you bra drop the price of samsung 10 , we can fill that department for people to come out for it. You cant move people by price in the smartphone market. Remotely like you can move appliances or all kind of things. People want the product. They dont want the cheapest product. And the royalty is usually how that doesnt mean somebody cant come along with a product thats theres jumps in the field or something. Once you have a product to a degree that controls your life, its a very, very valuable product for people who build their lives around it. Thats true of 8 year olds and 80yearolds. People who question apples future saying people are paying 800 for a smartphone. And the other reality in technology is that prices eventually come down. Unless youre adding more and more value to that product, the price will come down. So what happens if people i guess the question is, will people always be willing to pay 800 or more for a phone . Or will that wind up being a cost that comes down and down . Well it can be that way. Usually its because of theres competition between products. Some manufacturers say they cant beat apple on their own terms so they drop their product down to 100 bucks or 200 bucks. Some products are susceptible, some are not. So far, youve had big differences in products. People come back in if they had an. Le beforapple youre going to h much cheaper selling smartphone right next to it. And theyll look at it. You have a cheaper tv, and youre looking at it saying whats the difference . Right. And you buy the cheaper tv. And thats true. Its not to say that apple doesnt have somewhat the same prices but very little. Some of that comes along and leapfrogs in the way of technology and adds benefits that would be the more competitive threat to me than price competition, it would be benefit competition. I dont know what that is. But apple gave me a whole lot of things that i never realized until in the end. Lets talk about just the stock price again. You said it made sense to you when you started buying into it. Shares have appreciated. Thats the problem. Im cheap. And theres always an anchoring problem with buying stocks. Its just harder to buy them at harder prices. So does that signify that youve stopped buying in apple because of where prices are . Well, maybe not. But, you slithered in there. Okay. I guess when you say the earnings that came out, you werent bothered or disappointed by the earnings when you see the stock price pull back, you probably like it at that point . Yeah. Apple was a nonnew product if they sold Something Like this. Thats a lot of units to sell, 700. A lot of those are going to people who are actually replacing a present apple. But they do know that a new product is going to be out in six months or something. Who knows maybe they got promised an apple for their birthday or graduation. I would be tempted if i were going to buy one, what do i lose by doing this . Its a lot of product to sell with a new model coming outside. Weve talked to you pretty extensively about ibm. Andrew and i got a chance to ask questions from the stage at the Shareholder Meeting this weekend. We only asked about six questions and we got thousands of questions from shareholders. One question that did come in from a shareholder that i didnt get a chance to ask you. One was about ibm and watson. Using geico, you wonder if your sale of ibm was related in way to the performance of watson . No. Weve been experimenting in a lot of possibilities with watson at geico. And weve experimented with various different possibilities. So far, its done certain things and it hasnt done certain things. But that same kind of scompae t experimentation is going on in hospitals. H r block works with it this were. And watson, a Pretty Amazing invention it has. And it is getting put into use, a lot of places. So, its a really interesting product. And im sure the revenue is growing very significantly, but from a very small base. But i would say youve got other very smart people and give them some time to work on other products. And i would say when you get into that area, if you do have to worry, even more than with the phone, worry about somebody jumping a utility or Something Like that. Where it really becomes valuable, i mean, obviously valuable, to be able to look at trades and that sort of thing much faster than humans can. And read all of the pages and all of that. I would think the biggest value will come in when it actually replaces human labor. I mean that is so quantifiable. And machines dont come around annually and ask for higher wages. They dont need health care and maintenance. Butful they replace if they replace people in a big way, it would have a lot of value. Unless somebody else has some other product to do this kind of thing. So its artificial intelligence, but its very much so in the artificial emphasis on artificial in that sense . Yeah, i think theyll call it something slightly different. You and i in common language would call it artificial intelligence. And it is intelligence. The question is, how much better results can you get with it than using human beings . Or human human beings you can displace in getting it . Or can you get some entirely new form of information that humans are actually incapable of getting so they cant keep any word thats been written about Prostate Cancer or something in their minds and theyve Read Everything up to what was published yesterday. I mean, its got great potential. It has not come along as fast commercially, as you would have hoped on that. Its probably going at a very fast rate. But the base is probably really small. Andrew and joe, were going to have much more with mr. Buffett today. But right now, well send it back to you for a quick update as well. Okay. Warren hasnt seen any actual indications of any malevolent intent from watson, has he . Just the idea of watson i just remember what happened to those astronauts. You know, the ones that were actually in the you know, slowly how it turns down all the life support. You have seen that, yet, war re . Thats what i worry about with watson . Does he seem like a nice guy. I spent hours with him sand i kept an eye on him. If you dont need us you said it health care, we ask for raises. We ask for food. Were pretty superfluous to some extent. I dont trust watson but he probably has a pretty large server, right . Well, we all know what happened to hall in space odyssey. Actually, i talked to some very smart people not at ibm. Just about the whole idea of artificial intelligence. And you know, they all go Different Directions on this. But its not about watson specifically, about the whole subject of artificial intelligence. Youve read about it, too. Yes. Some people are worried. Genuinely worried. Genuinely. Some people are worried down the road, we probably do need to think about it, you know . Ive got the cure for it. Ive got the cure for it. Dont worry as much under those circumstances. Yeah. Thank you for doing this. We were just talking about what an amazing what you do for three or four days is like super human almost. Three or four days a week three or four days a year i work. When i work, i make sure is going and then i disappear. Okay, warren, were going to come back to you in just a couple minutes. Im going to try to get you a warren doll. I think you need one. Warren, thank you, well come back to you in a second. Quick many practicing note, tomorrow on power lunch, you wont want to miss this, wilfred frosts exclusive interview with the ceo loyal blankfein. 2 15 on power lunch. We return with Warren Buffett in just a moment. I am benedict arnold, the infamous traitor. 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Well take 2 [ laughing ] xfinity x1 gives you exclusive access to the best of the Billboard Music awards just by using your voice. The Billboard Music awards. Sunday, may 21st eight seven central only on abc. Hey, coming up, much more from Berkshire Hathaways Warren Buffett after the break. Programming note tomorrow on squawk box, well be joined by real estate magnate sam zell. It will be fun. Heres a look at last weeks s p 500 winners and losers. Good week for the s p. Everything is running smoothly. Im sorry, im afraid i cant do that. S was built with passion. But i keep it growing by making every dollar count. Thats why i have the spark cash card from capital one. With it, i earn unlimited 2 cash back on all of my purchasing. And that unlimited 2 cash back from spark means thousands of dollars each year going back into my business. Which adds fuel to my bottom line. Whats in your wallet . The power of 100 of the worlds top companies. The power of a proven 15year track record. The power of an etf. The power of qqq. The thinking we put in, clients get out. Power your clients portfolio at powershares. Com qqq. Before investing, consider the Funds Investment objectives, risks, charges and expenses. Call 8009830903 for the prospectus containing this information. Read it carefully. Distributed by invesco distributors inc. Live from the beating heart of business, new york city, this is squawk box. Good morning. U. S. Equity futures at this hour continue to trade lower. Not a complete surprise, i guess, after the markets basically now up on the s p, up 2. Nasdaq up 4. About the same with the markets probably happy about what happened in france. But it was such of a large win. And the polls were 20 plus points ahead. So, i dont think that the its any surprise that was expected by anyone. European markets are down as well. Wall street agenda, lots of fed speak on the docket with a speech from a policymaker every day of the week. Well hear from fed president rosengren, moster, and harker. On the labor front, and the price index one to watch on thursday. Then on friday, the Consumer Price index, even rae tail sales. On the corporate front big names expected to report quarterly earns including sysco with an s. Toyota, and disney, and twench century fox, whole foods, thursday, macys and nordstrom, friday, jcpenney. Meantime back to becky quick who is in omaha with our special guest. Becky. Andrew, thank you very much. Were live with Warren Buffett after speaking to shareholders here who made it to omaha, about 40,000 or so. Joe just mentioned ted top, the markets are probably not that surprised with the result of the French Election. Macron winning and le pen going ahead sand admitting defeat. When did you find out about the French Election. When did you hear about lin pe conceding . When did i hear about le pen conceding . I went to bed early. It wasnt something you were waiting around on . No, not really. I cant think of what i really have done much about purchases or sales in connection with any election. I mean, every time when i was a kid, every time a democrat got elected, there was a wake in our house. And my father would Start Storing suggestore ing sugar or Something Like that. So, i learned not to put too much weight in any given election. So, this is not something if things had gone the other way, do you think the Market Reaction would have been as swift as the fed had anticipated . Well, it might well have been. But people who get fooled on Market Reactions and just with that lot of it, came back within the next few hours or so, i dont think im any good at that. People would be a lot faster, if i were on the floor of the exchange now, id probably start you dont make those knee jerk reaction . No. Just think of all of the events that have happened in a hundred years or even in 75 years of investment. If i reacted to every one of them, the reaction percentage would be terrible. All the way across. And id be out. Market at times. I never want to be out of the market. Its not a question of being in the market. Its a question of owning businesses. If i wanted to own farms, i wouldnt be buying and selling them based on an election. I wouldnt try to figure out that sort of thing. I look at business the same way. Lets talk about the u. S. Economy. Because there have been a lot of questions about just how were doing. We had that First Quarter gdp number that came in 0. 7 . Does this feel like a 0. 7 economy to you . What do you see . Well, it doesnt feel like one. I think i think since the fall of 2009. And its more growth at a 2 rate. I think deviations from that are likely to be problems in collecting the information. Or having the proper seasonal. Or by the fact that quarter to quarter, its mentioned over a year ago. So you multiply that by four and change. A 0. 2 change becomes 8. I do not look at those figures with a lot of obviously, the 2008 to 2009 period, the economy falling apart was a pretty good gauge of how fast it was falling apart as opposed to some earlier recession. But ive never made a trade in the stock based on gdp figures. Lets talk about the figures that you do Pay Attention to. The numbers that you see coming back from the businesses that you own out right. Something like the railroad. Well, railroad figures changes every week. They put them out on wednesday morning. And they show 20 different categories, a plus and a multiple shown by railroad. It shows the canadian roads. And basically, the economy is doing okay. When i say okay, i mean, sort of the same 2 brs rat rate. Its not that precise for the rails. But thats helped the rails, natural gas has gone up in price. Theres a lot of coal that doesnt move at 2 natural gas. But moves at 3 a lot. Its the generation of it basically. And its the import. And right now, natural gas is close to 3. 25 on friday. And that dictates the use of coal a lot of places where it was maybe 2. 25 more, natural gas. Coal prices are probably up more. Theyre certainly up most dollarwise. And then Petroleum Products would be less. Grain is moving this year. Theres a lot of crops out there abdom and a lot more. That extra thousand cars of grain, youve got an extra 3,000 of revenue. But thats a product of low prices for grain so the farmers wanted to store more big crops and well learn from the fall this year, whether another big crop, and well carry a lot of crane grain, if it happens. If for some reason, its a little crop, it comes down. One of the things that surprised me that i hadnt realized until we spoke with matt rose this weekend. The truckers who i always thought of the railroads biggest competitive, i didnt realize it is also their biggest customer . Thats true. They love those and doublestack them. And they are the five biggest customers. Weve got snyder just went public recently. Those are big customers. I mean, they have they have an advantage just to start with in a huge percentage of cases. But if youre really going to move heavy traffic hundreds and hundred us of miles, block traffic, theyre better off signaling a railroad than picking it up on the other end. At christmastime, u. P. S. And everybody, a lot of it will move by rail. Also, when it comes to housing, youve got a pretty good idea of whats happening there. Not only do you have a realtor, acme, sharp carpet, Benjamin Moore paints. I was trying to think of housing. Where do you see the Housing Market right now . Its Getting Better, both in resell of existing homes. Clayton home sales, thats a manufactured home product. Theyre up significantly. This year. We have three site build builders, where clayton has started going to that, in tennessee and georgia. And theyre all going. Now its not boom time for any of these, but its a lot better than three or four years ago. And its a lot better than last year. And i would anticipate it continues to get better. Theres a huge shift after 2008 and 2009 for people who wanted to buy. We have 69 home ownership. And then i think it dropped to 63 or Something Like that. And theres some reasons why maybe it will stay lower. For one thing, when people bought houses in the early 2000s. They thought almost for sure, flippers or people convince they had couldnt lose. People dont feel that way after what happened. And then anytime you have a recession it affect s matrimony and a whole bunch of things. Thats where its off. And Home Building will be the best this year, in my view, since things went to hell in 2008. Millennials are actually starting to buy homes . Yeah. And i cant really get into specific engagements too well but i see the aggregate figures. And thats true, you know, brick sales will be better than they have been so far this year. And they were better last year. And now, people are changing their minds about what kind of covering they want for their floor. Hardwood, theres been some change in referencepreferences. But when new home sales pickup, when houses change hands, paint picks up. Theres a big system there that feeds. And we see improvement and boom times. But you can get some feeling for that part of the economy. And weve got 80 plus auto dealerships. You know whats going on with that anyway, because the Car Companies report so frequently of their sales but the economys Getting Better. The economy was the economy has been Getting Better since 2009. In terms what you see from the industrial size of things, youve got inc, a lot of industrial areas, too, have you picked up in that part of the business . Well, that was slow. But we saw a share uptick, not huge. But noticeable, in march. And well see how much carrythrough there is today. The industrial stuff, in many cases, went into the energy, oil and gas business. So, they slowed down in oil and gas, affected a lot of different types of industrial activity. It backs up through. And through a lot of equipment. So, it was definitely affected by that. But the most recent figures would be encouraging but incomplete. Id like to just ask you, we talk all the time about the animal spirits that started moving. The stock market runup after Donald Trumps election. Does that show up in your numbers anywhere . Animal spirits are shorthand for saying people have gotten more optimistic. Business has gotten more optimistic. Consumer confidence rose. The stock market rose. Does that show up in the says market . Well do a certain extent. You look at charge card, in the First Quarter, visa, American Express, you name it. We have those figures. They got they were quite strong. And got stronger in march. So, those are big numbers. I mean, people charge lots of stuff on credit cards. And American Express lost youre not comparing apples to apples there. But you make adjustments for that. And around the world. Up from 17. 5 from express corp. Theyre up 15 in japan. Im talking local currency. U. S. Was very good. Better than i anticipated, and it got better through the quarter. And certainly through the First Quarter or the Fourth Quarter . First quarter. First quarter, yeah. And Jpmorgan Chase is doing very well with their card. I just think that you see that you can see what the consumer is doing. The credit card line will tell you a lot about the consumer. Do you see it showing up in your furniture mart, at candy and dairy queen . How is that . Its doing well. The furniture mart. And we have other furniture in the west and jordans in boston. Theres they show decent gains. Okay. Were going to have much more from warren. And by the way, guys, if you want to jump in, feel free to do that. Were going to have much more from him coming up. We still have to talk to him about 3g and the political environment. And airlines and the controversy there happening now. Well go back to you. Thank you, becky. We do have lots of questions for mr. Buffett. When we return to omaha, much more Warren Buffett and omaha. And tomorrow, Chamath Palihapitiya is going to be our guest tomorrow. Joining us starting at 8 00 a. M. And sam zell. Were watching squawk box right here on cnbc. Mr. Buffett, back in a moment. Go to protect your vehicle . Im on it. Weathertech. Made right, in america i count on my dell small for tech advice. With one phone call, i get products that suit my needs and i get back to business. Ok if you want to stay on top of your health, one simple thing to do is take the pledge to go and get screened for the cancers that might affect you. So stand up to cancer and take the pledge at getscreenednow. Org it only takes a minute to take care of yourself, and nothing rhymes with org. Box, everybody. We are live in omaha, nebraska, with Berkshire Hathaways chairman and ceo Warren Buffett who is sitting down with us for his first interview since speaking to the berkshire faithful who made their way here. About 40,000 shareholders who were here in omaha over the weekend. Warren, thank you again for sitting down with us. Thank you. A lot of questions brought up by Share Holders this weekend. Some them had to do with 3g, the Investment Firm that you all have been active with in a lot of different ways. Its not new controversy. Its issues brought up because 3g acts differently with businesses than the way you have with businesses in the past. Theyre all about operation and getting things streamlined very quickly. Usually when you buy a business, you like to have the management there. You keep the management and continue to run. But it did bring questions, but, again, from shareholder this year. Including questions about how politically savvy it is to be doing business with a company thats going to be laying off employees in this political environment. With this president who has said hes very much in favor of protecting american job us. How do you respond to that . Well, it does have a political response. And it varies depending on who is president or in 2particular, layoffs, becky, if we had not changed in eye way we did business, we would be living in the way we lived in 1776. I mean, productivity gains are the only way that consumption gains if productivity per capita 12stays the same, consumption per capita stays the same. Over time, tools and tractors, fertilizer, all of those things, somewhere 80 of people working on farms have to be just to feed the country. We now have less than 3 . 90 of people can turn out other things you that want. Productivity everybody understands productivity gains gdp, but when they happen to you, very understandably, you feel like youre getting the short end of the stick. Society may be benefitting, but youre getting hurt. And weve always we tried buying a few businesses that had companies in all of that. And eventually, 2,000 people working at berkshire textiles knows or other businesses that we were in. So, weve tried at berkshire to buy them and keep them that way and have them mced thaanaged th. 3g has come into business where they can dot same business with a lot of money. That happens. But that has been that they fold the standard capitalist formula, marxist formula with trying to do business. And that benefits perv, particularly benefits the owner. But its a painful process and sometimes, theres a big creation to it. 36,000 people in the early 1970s, he cleaned up the problem, almost half of its employees. And for the people, it was painful it was because of a management mistake. People got laid off. No fault of their own at all. They just it was just management came up with the wrong prices and were losing money and they were going to go bankrupt. And jack came in and saved the company. In the process of saying somebody that laid eoff thousans of people. So there will be readjustment for the Railroad Industry after world war ii. At Something Like 1. 6 Million People working in it, and now 200,000. But 1. 6 million, under 200,000. Carrying considerably more fact. But the improvement in productivity has been dramatic. Otherwise there wouldnt be any railroad existing like it did in 1946. But its easy to talk about, but its the same problem as trade. Trade benefits people in invisible and small ways, and to the person it puts out of business, who spent 25 years learning a trade as a steelworker or manufacturer it is a disaster. And a rich country, and were ungodly rich as a country, 57,000 or 58,000 of gdp per capita, we have to take care of people who who are the roadkill in better output for all the rest of us. And i dont blame anybody for voting against the system that they think is is bypassing them and just throwing them aside. Because if youre a 55yearold steelworker or 5yearold shoe manufacturer, you are not going to learn a new trade. And youre not going to have another job thats good. And, yeah, society has to take care of them, because its achieving as a societal objective which is to get more output per capita. Andrew has a question on this, as well. Andrew . Warren, to the extent that 3g is successful at using its zero base budgeting to bring more efficiencies out of the companies that it owns, how much pressure do you think its going to put on other units of berkshire or companies that berkshire owns for example cocacola, which may have to follow the same type of model to keep the same type of margins, given the success that 3g may ultimately have. James quincy, the new the ceo of cocacola or designated ceo, has already said that there will tb 1200 jobs reduced at headquarters of cocacola. Now cocacola has been a very, very Profitable Company over the years, and could afford to have lots of people around who arent really changing productivity that much. But, volume has leveled off more or less. But i would argue that even if it was prosperous it shouldnt have more people doing it than were needed. Thats the guts of capitalism, is you dont have a lot of people doing something when fewer people can get the job done. You free those people up to work in other areas, and innovate for them so that they bring out new products, and people live better when theres more output per capita. So you dont gain anything by having thousands of people. You can afford to do it in some cases. But cocacola is doing exactly the right thing. If they look at their operations, say how many people do we need to do the job right . And if youre very prosperous, companies in the past, they were so prosperous, it really didnt make any difference. I forget the name of the fellow who flew around with us, sent the airplanes for his dogs and all of that sort of stuff and they could afford to do it. But that output for america, you know, goes down when that plane nice around with a dog in it. And prosperous companies tend to be sloppier than companies that are in tougher businesses. And packaged goods generally is a very profitable business. I mean if you look at the Great Companies that deal for decades and decades and decades, they earn high returns on capital. And so you probably found more sloppiness in employment than you would find if you ran a very tough Retail Business like my grandfathers grocery store. He just couldnt afford it. Do you still like these companies where you see the margins coming down pretty significantly . In Industries Like consumer package goods, Companies Like cocacola, like kraft, youve got Major Investments in these areas. Kraft the margins have come up, because they theyre doing just as much business. But, theyre not they dont they dont have people there that they dont need. And cocacola, james quincy has announced 1200 people i will guarantee you they wont cocacola because those 1200 people are gone. And, we have in berkshires businesses, some of them, a certain amount of slop. You know. I mean, we dont we dont drive it as hard as we could. But thats no tribute to me. It just means i dont that isnt something i like spending my time on. I dont like a lot of inefficiencies. Some of our companies are extremely efficient. But it is they are not as efficient as if to feed myself tonight i had to have them running at maximum efficiency. But thats a defect of mine. Thats something to brag about. Andrew i think you have some news, as well. We do have some deal news. We can you know, this is the kind of company, actually, that Warren Buffett i would have thought might even want to buy. Retailer coach is acquiring kate spied for 18. 50 per share in cash. The transaction has been approved by both companies. The deal worth 2. 4 billion its 27 premium from when speculation and some news reports came out at the end of december, actually, 2016. So its taken quite awhile to get this transaction across the tape. But there it is, right there, youre looking at a deal, coach acquiring kate spade this morning. Were going to have a lot more from Warren Buffett. Get his take on the markets, the economy, jobs, and the fed coming up in the next two hours of squawk box. Back in a moment. The power of a low volatility investing approach. The power of smart beta. Power your clients portfolio with powershares. Before investing, consider the Funds Investment objectives, risks, charges and expenses. Call 8009830903 for the prospectus containing this information. Read it carefully. Distributed by invesco distributors inc. Containing this information. Read it carefully. So we know how to cover almost alanything. Ything, even a coupe soup. [woman] so beautiful. [man] beautiful just like you. [woman] oh, why thank you. [burke] and we covered it, november sixth, twothousandnine. Talk to farmers. We know a thing or two because weve seen a thing or two. We are farmers. Bumpadum, bumbumbumbum we cut the price of trades to give investors even more value. And at 4. 95, you can trade with a clear advantage. Fidelity, where smarter investors will always be. Straight ahead, Warren Buffett digs into wells fargo. Defends the airlines and talks Stock Investments after the Berkshire Hathaway annual meeting. His comments in a special one hour event coming up. Plus, centrist candidate Emmanuel Macron winning the french president ial election. Market reaction and what it means for the Global Economy is just minutes away. And reports this morning that comcast and Charter Communications are joining forces in the wireless business. Details straight ahead. The second hour of this special edition of squawk box with Warren Buffett begins right now. Live from the beating heart of business, new york city, this is squawk box. Welcome back to squawk box right here on cnbc. Were live at the nasdaq marketsite in times square im Andrew Ross Sorkin along with joe kernen. And becky is in omaha this morning speaking with Berkshire Hathaway chairman and ceo Warren Buffett. And were going to get back to here and mr. Buffet in just a moment. But we do want to show you the futures right now, after some big news over the weekend, perhaps impacting markets. Dow looks like it would open, well, just down marginally about three points. We can call it virtually unch and the s p 500 up a point and a half and the nasdaq up three points and a and a half. The big news over the weekend the French Election coming out as anticipated with Emmanuel Macron beating Marine Le Pen by a wide margin. Macron won 66. 1 of that vote. Le pen had promised to pull france out of the eu if she won. Also, coach just announcing a deal to buy clothing and accessories maker kate spade. The deal is worth 18. 50 per share in cash. Its a 27 premium of prior to when the deal was first speculated about in the press. Total deal value, 2. 4 billion. Coach says it will be able to save about 50 million in costs through operational efficiencies within three years. And gasoline prices is down five cents over the past two weeks according to the latest lundberg survey. The average price of a regular gallon 2kst. 41, 2. 41 still 14 higher than a year ago. Better start paying attention. Yeah. To these gas things. Yeah. As a potential consumer. Potential we do. Oh, for me because i do you even know where to get gas . I do not. Is there a place . Near the west side. Yeah. Towards the west side 450iway theres a couple of gas stations. Not a lot. Selfservice. Selfservice. New jersey cheaper and they do it for you. And youve done it . Ive done both. Dont overfill. Spills out, gets on your hands, smells, ive got some other tips for you. Developing story this morning. Sources are telling cnbc that comcast and Charter Communications plan to announce a Wireless Partnership as soon as today. Partnership is aimed at cutting the costs, as well as speeding up entry into the wireless market and as part of the agreement Neither Company will make any deals in the Wireless World for the next year without talking to the other and getting consent. The move is renewing speculation that the two cable giants could make a play for a wireless carrier company. Cable companys been looking up to wireless to retain existing customers as well as make their bundles more attractive to new customers and shares of cnbc parent comcast, they were looking at a i dont know how long, i guess thats a year chart. But comcast pretty close to an alltime high and had a pretty good session on friday. And you can see charter has had a big year. Lets get back to becky who is in omaha this morning following the Berkshire Hathaway annual meeting. And shes joined by none other than Warren Buffett this morning. Who, becky, you dont need like to know about a company, you dont necessarily have to use their products and stuff. Im just thinking about warren opining on the Airline Industry. You know where im going with this. I thought you were talking about apple because he doesnt have an iphone either. Or apple. But, you know, i love to hear his comments on the Airline Industry, because you know, friends have been telling him about what its like to be at a one of those airports and stuff. And you would walk on and would be like the rich kid that says who are these other people, dad, when they finally fly on you have no idea buffett. I mean, dont pretend to so you read up on it, i guess, right . Is that thats about the extent of it. I would make a small bet, joe, that i have taken more commercial airline well youre 86 or 87 than you have in your life. Okay, all right. Youve taken more breaths than me, too. Thats not going to do it, boy. Thats not going to i always say the last movie you saw in flight was a had just come out it was casablanca. That was the last movie you saw on an inflight commercial. I saw riding on a plane about a plane that goes down. I on a commercial flight. Warren, lets shift gears. Were going to talk about Something Else but lets talk airlines right here since joe just gave us that great entree point to it. Sort of easy. Exactly. Like answer this now following up, you are, through berkshire the largest investor in four major airlines. Correct. Including united. And we have seen the troubles at united. We havent really gotten the chance to talk to you too much about that. What did you think as the largest shareholder when you saw the video of dr. David dao being dragged off and then the response from oscar munoz, who was called in front of Congress Last week to testify on this along with some other airline ceos. Obviously its a terrible mistake. And you actually stated that you know, i saw the event with the fellow being dragged off and then the response. I kind of wonder whether oscar had actually seen that when he made the response. If so it was a bigger mistake by far than if he hadnt seen it. And i dont know the answer to that. But, but, the the natural tendency if youve got 80,000 employees and youre about some incident is to defend your employees. But it wouldnt be your natural tendency if youd seen the tape. So i dont know precisely. In either case it was a mistake. In one case it was an egregious mistake. And you know, hes apologized many times. But, your first reaction is going to get a lot of attention. I understand what youre pointing to. Like united has had some employees that have been unhappy since the merger. Theyve had some issues, some legacy issues and things theyve been trying to deal with. He has been concerned about trying to make sure that the employees feel good about things. But again, that video, and that tone deaf response made a lot of people feel like they have forgotten that these are customers, paying customers. I mean, and i worry about that with 367,000 employees, as well. Somebody stands on their feet all day selling candy and people are yelling at them, and you know its valentines day and theyre trying like crazy to keep up, there will be certain people that may blow up, you know, like david. We have actually someone just walk off the job, they just get tired of it. Oh, really . Yeah, sure. Well, what really gets them is that we hire lots of temporary help, obviously, at holidays and the customers know more about the product than the people we hire. I mean, well hire people just have 100 different pieces and maybe educate them a little but the customers been coming in for 30 years. And psychologically its hard to handle when a customer starts telling you, you dont know what youre doing. You know. And, so a certain number of people may behave badly and behave real badly and not too many people do it. But we will have well have somebody do something. Well have more than one somebody do something if we have thousands and thousands of retail transactions, for example, some people dont follow the rules. We had an accident, you know, awhile back on the railroad that somebody didnt follow the rules, and there the penalty is huge in terms of injuries and so on. You do the best you can on it, and you know, the first report i get from that every quarter the first topic is safety. The head of the first report is safety. And, the injuries have been driven down, and down, but hes not happy until he gets to zero. I know thats what he wants to do but you want get them to zero. But you you really you want people to be treating everybody they meet in business as if its the person they love the most. I mean, i at geico weve got thousands of people on the phone and theyre just getting calls all the time, and i like them to have a picture of whomever they love the most, you know, be their mother, their wife, their dog, whatever it is, be talking to that person. Because it really comes through. You know, you mention that on valentines day maybe you have somebody on their feet all day, they get fed up and maybe they walk off the job. You can understand why airline employees get frustrated because everybody in the airport is mad because conditions in the airport getting through tsa, and then frankly what the airlines have done themselves with their own policies where youre charging people for bags, youre cramming people in with less and less leg room, its become very commoditized maybe the people feel more like cattle than customers coming through here. Part of that the airlines are responsible. Not all of it. But the airlines themselves have created those situations. One of the things theyve found is a very High Percentage of people are very price conscious. So, it they may become like cattle cars, but, people would rather be treated like a significant percentage would rather be treated that way and fly for x, than have far more leg room, and more, you know, all kinds of things, and travel for x plus 25 . So to some extent they try to segment that. Have they pushed a little too far . Along those lines . Well, if so the customer will tell them, you know, basically by buying. You know the customer would tell them by flying somewhere else but the problem is with airlines you often dont have a choice. More than 70 of the Airline Flights that are originated out of newark are united Airline Flights. I dont have a choice when thats my home. Yeah. My home place to go. Yeah but some people i mean we suggested to people actually that at the end of the berkshire meeting, because the prices went up a lot. The demand went up a lot, put up thousands and thousands of extra seats the Airlines Told me. So i actually put in the annual report every year, you can fly to kansas city during the annual meeting, way cheaper than you can fly to omaha and rent a car there and be here in a couple of hours. And a fair number of people actually do that. You know. But a lot of people dont. I mean, its people have different preferences. But, theres no question, i mean, i would hate to run an airline. People are traveling. Theyre hoping to make a wedding. Theyre hoping to make a business appointment. Its important to them. It is. It is. And i understand all of the issues. I guess im asking you as the largest shareholder, it sounds like you have not had any conversations with oscar munoz. Ive never met him or talked to him. Im asking you if it concerns you when reactions like this get the heads of these airlines called up in front of congress. Its bad. Would that potentially change the Investment Strategy . It wouldnt change the Investment Strategy. Its bad. I mean, how bad it is, but there is no way that you arent going to read about some airline. The one thing going for the airlines is theyve become unbelievably safe. And i never would have dreamt. But they have also worked toward having higher load factors. When they have load factors in the, you know, like they did in the past, around 70 i mean, they all went bankrupt. And they need high load factors, and high load factors mean a fair amount of discomfort, and it has kept prices from going up, but as you point out as joe points out, not me. Its its a job i dont want. Running an airline. I guess the only question is, do you think congress would do anything that would make your investment less worthwhile . They could. I dont think they will, unlikely. But the interesting thing about it is, if you regulatesed the airlines, reregulated them, you would have well you could have more leg space. You could have you could have no overbooking. You could regulate all kinds of things. The cost will go up. And and thats the tradeoff. Andrew, you had a question, too . In the similar vein warren i have two questions. One relates to just whether you think, about regulating the airlines per se but just the idea in certain markets you could see some pressure to open up more slots or effectively take slots from Different Airlines and try to give them to others, what would you think the risk is to the investment thesis from that perspective . Yeah, well, if you get more planes around, called seat miles, too many seat miles around, it just gets to be brutal. I mean they all went broke. If you put in bankruptcy and airlines, and search youll see youll see in 100 names or thereabouts just in the last 30 years and youll see, you know, all the big names you wont see southwest or alaska but youll see the big names, i mean, it is its a brutal business because the incremental cost of one extra person in an empty seat is practically nothing. And the problem you have is keeping the pricing of that incremental seat from infecting all of the seats on the plane. And Everybody Knows the prices every day. So its theres no theres no way to dress it up or anything. Theres ways of offering different combinations like whether you charge or this or that, and some people like that and some people dont like it, everything you do, though, your competition can copy. Now becky mentioned the point, if youve got enough of the gates at a given airline, then you have some protection as long as people want to fly from there. But people travel to other airports, too, under those circumstances. It is its a very, very tough business. If you want one figure that really counts, in determining how well the airlines are going to work economically its going to be its going to be the percentage of seat occupancy basically. I was a director of usair, a really dumb investment on my part. I made it all by myself, i didnt even tell charlie, and by the time the ink was drying, i knew it was dumb. And then it got dumber. And, that airline actually went broke twice. Fortunately there was a blip in between, and we actually made a pretty fair profit out of the stock but we didnt deserve it. And it went broke twice and they would have a route like and im pulling this out of the air obviously but philadelphia, pittsburgh or Something Like that, and as long as they were the dominant carrier with a lot of gates at each end, it did fine and then southwest or somebody would come in and they would look at 14 cents a seat mile, revenue mile and you know they could do it for 12 cents, and and a big enough price differential moved people over and of course, the industry is looking for all kinds of things, loyalty points and all that, to make it stickier but in the truth, when people are going to buy from x to y they can go to their computer and figure out theyre going to quickly see how much its going to cost them. And, its a tough its a tough business. It was a suicidal business for a long time. Having the consolidation that came about through the bankruptcies, made it an extremely competitive business. I dont think its a suicidal business anymore. But if they get down to running at 70 of capacity or Something Like that, it will be suicidal again. Andrew you had a followup . Warren real quick, the other thing i was curious about is many of the u. S. Airlines have lobbied the Trump Administration have lobbied other washington lawmakers against part of the open skies agreement arguing that a number of the middle Eastern Airlines like emirates have effectively been subsidized in dumping their services in the United States at prices that are below what it truly costs them. About a 50 billion subsidy theyve described. Do you agree with that assess . And what do you think should happen if thats true . I dont know the facts on it. But i would say that over the years thereve been a fair amount of low cost pricing and any time youre in a business where your competitor is getting into below cost pricing and theres not huge difference in the publics mind between flying airline a or airline b, the timing of their departure and all that arrivals may make some difference but people are very price sensitive, and people are pricing below cost, when i was on the board of us air is we had a lot of planes out in the desert, and if you get a lot of planes out of the desert, you got problems. And so i and i would say that if you you you should try to figure out best system for having reliable, safe, planes operate i operating, its better if overall operating at a loss because if theyre operating at a loss youre going to have a bankruptcy situation and youre going to have to redo Union Contracts and all sorts of things like that. Incidentally one other factor in the Airline Industry currently i mean you really do have a Pilot Shortage to some degree, and pilots come in from the military. And theyre just not coming in as much anymore. What does that mean . Well it just means that the pilots union is getting some strength relatively and now there are differentials if you work for the Smaller Airlines and all of that. But if youre running a big airline one of the things on your list of things to worry about is labor costs. And you need experienced pilots. I mean you have high requirements of hours for those people to be. In those seats. Were going to have much more coming up with Warren Buffett but guys why dont we send it back to you right now. Okay, becky. We will come back to you in just a minute. More from omaha and Berkshire Hathaway chairman and ceo Warren Buffett but first, before we do that, quick check on the markets this hour. Looking at the dow off about seven points this morning, s p 500 marginally up along with the nasdaq. Oil well show you right now up a barrel at wti crude 46. 31. And then a quick look at the 10year note youre looking right now at 2. 340. And quick programming note tomorrow on squawk box we got sam zell who is going to be our special guest at 7 00 a. M. And then in the afternoon youll want to see wilfred frost interview with lloyd blankfein. A lot going on on cnbc tomorrow. When we come back, mr. Buffett back in the house. Back in a moment. [vo] when it comes to investing, looking from a fresh perspective can make all the difference. It can provide what we call an unlock a realization that often reveals a better path forward. At wells fargo, its our expertise in finding this kind of insight that has lead us to become one of the largest investment and Wealth Management firms in the country. Discover how we can help find your unlock. The shlike a bald penguin. How do i look . [ laughing ] show me the Billboard Music awards. Show me top artist. Show me the top hot 100 artist. They give awards for being hot and 100 years old . Well take 2 [ laughing ] xfinity x1 gives you exclusive access to the best of the Billboard Music awards just by using your voice. The Billboard Music awards. Sunday, may 21st eight seven central only on abc. Welcome back to squawk box everyone. We are live in omaha, nebraska, with Berkshire Hathaways chairman and ceo Warren Buffett. Hes been sitting down with us going through a lot of issues. This is his first interview since talking to the 40,000 or so berkshire shareholders who showed up here in omaha this weekend. Warren, one of the items that came up with a little bit of controversy over the weekend was wells fargo. That was the first question that was posed to you from from a shareholder. And the questions a lot of them came in, and they were all kind of related to what you thought about wells fargo. Now, in the past youve run that clip from your congressional hearings over solomon brothers, and the very famous clip, lose a shred of reputation for the firm and i would be ruthless. I did have one shareholder who wrote in a question asking why you werent ruthless when it came to wells fargo. Well, the ceo lost his job, and i was not a director so i would say that the ceo feels that his life has been an important way ruined. I mean, and incidentally, i dont i know john some. I dont think it had anything to do with him making money. But i and i dont know what happened because i maybe would talk to him once a year or something of the sort. But, they obviously came up with an incentive system, that incented the wrong things. Now, most businesses do that from time to time. Weve done it at various businesses. I mean, you think you come up with a brilliant idea, and then you find out that it gets its probably happening in your family. In terms of deciding what allowance to give or what, you know, things not everything works out as you anticipate. Thats okay. But you get signals back that it isnt working and you got to stop it. The big mistake was whenever sufficient information had come back that this was producing a counterproductive effect, its not resulting in more cross selling as we call it, but all kinds of games being played and phony accounts and all that sort of stuff, thats the moment of truth. That is the big moment because you have to stop it then. And youve just got to say whats wrong with the system and how do we correct it . And believe me that happens berkshire that happens every place. If you dont do it immediately, and you let it run for awhile, now youve got the ultimate problem, because everybody that comes in says yeah but why didnt you do this when you first heard about it . So that is the key time. And you we have a hotline. We have about 4,000 complaints of one sort or another that come in on the hotline. All, everybody works for berkshire has access to it. Comes in to omaha. Most are frivolous. The person next to me has bad breath or Something Like that. Well theyve got to work that on their own. Some of them, a good many of them, should go back to the human license departments of the company. Now they dont do the proper then thing we have to do something about it. But mainly things are at that level. Then a few are really, really important. And theyre anonymous and theres no retribution. And you would certainly think thats in any big bank, including wells fargo or any big institution of any kind the hotline is bringing in positive information. And whoever is in charge of that now at head of internal audit, it can be the general counsel, there should be people looking at that, and they should be deciding which to send back to subsidiaries but they should be deciding which ones should go to the ceo. And i have had a reasonable number of actions that came to me, either through the hotline, or anonymous letters to me, and you can you can tell when it might be something serious. We spent a lot of money investigating the things that come in like that. Because we turn it over to an onsite person frequently. And a big percentage of the time it led to something pretty big. And they, at wells fargo, you know that some stuff was coming up through the branches, and people and somebody didnt pay any attention to it. And if you wait a year, you know, its just totally bad news. Have you lost confidence in the bank as a result . Do you think the banks reputation has suffered as a result . And would you ever sell any shares as a result . Well the reputation has been hurt. The fundamental earning power of the bank has not been hurt in any material way but the reputation of the bank has been hurt. I would argue probably that better systems would be in place there now, just like they were at solomon then probably exists at most of the competitors. I mean, and thats true in other banks get slammed down on whether its mortgage things or some trading thing. I mean, i think that that does focus the mind. And it focuses the directors, it focuses the media, so, in general, i would bet on the practices being better in any operation thats had that kind of attack and scrutiny and deserve attack and scrutiny than it might be if you were just kind of sailing along thinking everything is i worry about getting complacent. Warren, were going to take a quick break and joe ill send it back to you. All right. Beck, thank you. Wow a lot of stuff warren says it keeps flashing on my screen. Its amazing. Its very important people want to know. And were going to have much more from Berkshire Hathaways Warren Buffett and then tomorrow Venture Capital investor champ palihapitiya. Will be our special guest for an hour. He hit it big when facebook went public and hes an owner of the nbas golden state warriors. Pretty good series were destined for cleveland and golden state again. Will join us tomorrow at 8 00 a. M. Youre watching skwm skwm on cnbc. It comes to technology, i need someone that understands my unique needs. My dell Small Business advisor has gotten to know our business so well that is feels like hes a part of our team. With one phone call, he sets me up with tailored products and services. And when my advisor is focused on my tech, i can focus on my Small Business. And the wolf huffed like you do sometimes, grandpa . Well, when you have copd, it can be hard to breathe. It can be hard to get air out, which can make it hard to get air in. So i talked to my doctor. She said. Symbicort could help you breathe better, starting within 5 minutes. Symbicort doesnt replace a rescue inhaler for sudden symptoms. 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Straight Path Communications is out with a news release this morning saying that a 184 dollar per share allstock bid from an Unnamed Company is superior to the deal it previously agreed to with at t. There was an identical release out friday, in which the bid from that Unnamed Company was worth 135. 96 a share. The at t deal was worth 95. 63 a share. No response from at t yet. Reports this morning say verizon is that Unnamed Company. And coach is buying kate spade for 2kst. 4 billion in cash. The deal is worth 18 cents a share and according to coach it will save it in costs in three years after the deal is complete. And two fed speakers will be making public appearances this morning. Cleveland fed president Loretta Moster and st. Louis fed president James Bullard will speak before the markets open. The fed left rates unchanged at its meeting last week. But many are expecting a rate hike during the june meeting. Okay we want to before we get back to omaha we should tell you some news just crossing, comcast and charter, we talked about it earlier, agreeing to explore operational efficiencies to speed entry into the wireless market. They effectively are forming an alliance in this respect when it comes to how to deal with the wireless market. Both of these companies have activated what theyre calling a mobile Virtual Network operator reseller agreement. Of course they have that deal with verizon wireless. Its going to be providing the wireless services, but together theyre going to Work Together they say, and a little quote from Brian Roberts this morning, were looking forward to launching Xfinity Mobile to our dus hers in the coming weeks and are excited to work with charter to explore ways we can make our respective wireless initiatives more effective and cost efficient. Both of our companies have Regional Wireless businesses using the same 4g lte network and by working together our goal is to create even more experiences for our customers. Of course, comcast the Parent Company of Nbc Universal and cnbc. We will talk more about this in just a minute. In the meantime we want to get back to omaha and becky quick who is with Warren Buffett this morning. Becky . Andrew, thank you very much. Warren, we have been sitting down and talking with you for the last hour and a half, which has been wonderful. And i havent pushed you on this yet, but this is something you spent a little bit of time talking about at the annual meeting this weekend. Probably the question that we get from viewers, and from shareholders more than any other is where do you think the market is headed and what do you think of market valuations right now . Its not something that youve often comment on in depth. This weekend you did talk a little bit about how its getting harder and harder to find deals. How there are a number of factors that have certainly driven up the price of businesses. Can you tell us what happening right now, whats going on . Well, the first part, where are the markets headed, i dont know. It will be higher ten years from now. It will be higher 20 years from now, 30 years in now. But i have no idea what the market will do in the shortterm. It it if i thought it was a productive area of exploration id do it. But i i dont know how to do it. My partner Charlie Munger doesnt know how to do it. So we think about businesses. Now unfortunately, right now, the largest quote business end quote we own weve got about 95 billion in and its selling at 100 times earnings, and the earnings cant go up. Which sounds like a pretty dumb investment. And it is. But thats what we get basically. And we literally have have its not all but we have 95 in cash including mostly bills and we are paying 100 times the earnings for Something Like i say where earnings cant go up if you get 1 . And that does not make me happy. And id like to buy businesses, we will buy businesses but it makes it much tougher when theres 1 money around. And the people who, many of the people who buy businesses use as much borrowed money as they can. And when they get that at rates that are based off that very low rate of 1 , they can pay a lot more money than we can icing what is pretty much all equity money. Because thats the way we look at money. So we have not made significant acquisition now for 15 months or thereabouts. Getting a little itchy oh, if it goes for 15 minutes i get itchy. But i cant afford to give in to the fact that i cant scratch. I get in big trouble. You know, once you buy a business, the business doesnt know what you paid for it. So it is not going to earn some appropriate amount just because you paid x for it, and if you do something dumb going in, either in terms of the kind of business you buy, or the price you pay for a perfectly decent business, the results are with you forever. So, its my job to allocate capital and its very much to allocate capital but thats okay. Its why i come to work every day. You did say over the weekend that if the sees candy seller had tried to get 5 million more from you you would have said no and walked away and that would have been a mistake. Are you still that cheap . No, im not as cheap. That taught me something. Im still cheap but not as cheap as i used to be. And charlie saved us on that one. The seller saved us because he did come down. But charlie also was pushing me somewhat. You can afford to overpay a bit for a really fine business depending on your degree of certainty that its a really fine business and its going to stay one for a long, long time. And you cant make that decision about most businesses. I mean, its just not given demand to be able to foresee 20 years out on most businesses. On the other hand, if you pay big prices for something, youre counting on earnings. Youre counting on being right a very High Percentage of the time. Our projections of earnings that go up and of course the best kind of earnings are the ones that go up without more Capital Investment. Its very easy to have great earnings in the utility business. You just put a slug of money and get a return out of it, the return isnt really that great. Youre really looking for something that will grow and i did mention one thing at the meeting which i dont think people appreciate at all, is if you take say the five businesses in the country by market value and asuchling berkshire is in there, those five businesses have a market value of 2. 5 trillion or more. You know, starting with apple. You could run those five businesses with no Equity Capital. So you have close to 10 of the market value perhaps of the United States in five extremely good businesses that essentially take no capital. Now that was not the case in the past. I mean if you were at the turn of the century and you were talking about u. S. Steel, and and the big railroads and all that, you made large sums, rockefeller with the oil business, by earning money with refineries or, or, or steel mills and finally earned enough so that you bought another one and you borrowed some money along the way. But you had to build up Equity Capital dramatically as you went along. And even if you go back to the fortune 500 of 30 years ago the companies that were big took big capital. Now, youve got the five highest valued companies in the country. They dont take any capital. Even ibm has net no tangible assets. You take the equity cap equity, subtract the intangible assets, its less than zero. And if you take businesses i mean they may they may invest some money in fixed assets and all but they actually need no Equity Capital. So you could have a 2. 5 trillion business in the United States, and not need Equity Capital. And that is a different world than the past. You, over the years, over the last 10 or 15 years have become a much more industrialized company. Things like the railroads that do require more capital equipment, more Capital Investment, when did you notice that the top five market Cap Companies required no Capital Investment . When did you make this realization . And does that explain your investment in apple . It doesnt explain it. Ive understood that for a long time. But its become more and more concentrated. Used to be exxon mobil up there, and some so the shift has been taking place and essentially the great, great, great businesses have become businesses that dont take capital. And that really wasnt i mean the Auto Industry took a lot of capital. The Aerospace Industry took a lot of capital. The Railroad Industry. These are huge industries that affected america. I mean they changed our country. Now youve got companies that have huge market values, changing the country, they dont take any money. Those companies for the way for people who are listening on radio we did just show a short of or a full screen of it, apple, microsoft, amazon, google, and who am i leaving out facebook. And facebook and those are the five and alphabet obviously the Parent Company of google. Thats thats a huge shift would you like berkshires businesses to be more reflective of that sort of new paradigm . Id love it. I just wasnt able to i got sees candy and i havent had one since quite like that. Weve got a few. But, those are the wonderful businesses. The businesses that grow, and dont require money, and of course thats why theyre awash in cash, and to the extent they made it abroad some of it theyd have to pay some tax if they brought it back. Now, they use some capital, but i mean they build headquarters and they have small amounts of inventory in some cases. Research and development. But, but if you took you dont need it. Absolutely, i can run those businesses, and i mean they could run them a lot better, with absolutely no Equity Capital. In fact, a huge negative Equity Capital. You cant run exxon mobil with negative capital. You cant run u. S. Steel. You cant run the railroads. All these massive industries, really what the country was built on up until not that many years ago and now theres this huge shift to intangibles and they produce products that people love. So, im not saying this is in any way, you know, frivolous or anything of the sort this way but it makes a big difference when people talk about capital shortages and how we need you know to bring the money back to the theres a whole bunch of things that are sort of built built on this conception of how business was 50 years ago and sometimes its useful for the people in those businesses, to sort of play up that fact and not what really has happened in the way of change. But it is a big change. Youre talking also about the shift away from an industrial economy. Away from more towards services, more towards blue collar or white collar jobs in many of these instances, too. If you can find businesses that dont take capital and earn a lot of money, thats how you can become rich very easily and very early now, this is easy to come up with it, but you can get the capitalized value of something and nobody says yeah but its going to take 100 billion to build it. Google had come along and the infrastructure required would have taken 100 billion you know. That would be a different situation. In fact, jeff bezos has talked about that in amazon he said look it with amazon he said we needed the internet. Somebody else spent billions of dollars developing it, but it wouldnt have worked without the internet. He said we needed transportation. Somebody else had already built the railroads and u. P. S. And all of that sort of thing and he said we needed payment systems. That would take billions of dollars to build. But that already already been done by visa and online so he took three huge requirements with the other guys had spent the money and then combined them in a way that he didnt have to spend the money. You have talked and its brilliant. I give him credit for it. You have talked extensively over the last several days, even the last several months, about how jeff bezos is the best Business Leader you think we have right now in the United States. About how amazon is a brilliant company. And now youre talking about how its one of five companies that take no capital to continue to build. How come you dont buy shares of amazon . Stupidity. I would i was impressed with jeff early. I never thought he could pull off what he did. And whats really i mean i thought he could pull off something. But, but on the scale that that has happened, us mean its changed your behavior. You know, its changed everybody in the offices behavior. And the remarkable thing about jeff, and Everything Else, is he has done it in two industries almost simultaneously that really dont have that much connection. Ive never seen any person develop two really Important Industries at the same time. And really be the operational guy in both. And hes done a good job with the Washington Post on the side just personally. But here he is taking cloud services. I mean he we could do a whole show on this that he did three or four months ago. He thought he would have two years of runway. He got seven years. You do not want to give jeff bezos a sevenyear head start. Before the competitors jumped in. So the same time hes shaking up the whole retail world, hes also shaking up the i. T. World, simultaneously, and you know, i take my hat off to him. But, by not buying shares right now that suggest that you think maybe theyre too rich, or is it that you dont understand . The companies valuations . Its a big valuation. Its very hard when you thought about something of one tenth the price but we do it occasionally and you know, youre talking now about getting multiples from the hundreds of billions, and but if you told me that you were going to shoot me at the end of ten years if if if a short were better than a long i mean i i would take the long side. But im not buying any. But i the these are powerful powerful ideas with big potential. And hes executed. And hes executed on it, and and thats what you tip your hat to. Now have you been in the process of looking for other Companies Back to your 95 billion. I thought it was 90 billion you told me last week. Its 95 billion in cash and Cash Equivalents . We put over the weekend and i think if you add up the cash every place now i dont really count all of it but i think if you take the Balance Sheet and you add up treasury bills, cash and equivalents, and you know, its higher now than it was on march 31st. And again, the arenas youre looking for deals anywhere but probably something north of 5 billion are the type that you reel in . Further north the better. Id like to be in the north pole. Okay. Guys were going to have more from Warren Buffett in just a few minutes. Including when we come back well ask him what the most important factor is in determining market valuations right now. Its a question that well put to him right after this break. Okay. Thank you for that becky. When we return Berkshire Hathaway vice chair Charlie Munger and microsoft cofounder bill gates are also going to join becky live alongside the oracle of omaha starting in just 15 minutes. As we head to a break some deal news if you missed it coach buying kate spade this morning for 18. 50 per share. In cash the total deal valued at 2. 4 billion. Coach says it will be able to save about 50 million in costs through operational efficiencies within three years. Squawk box returns with Warren Buffett in just a moment. Ll waik about her . Its definitely a new idea, but theres no business track record. Well, have you seen her work . No. Is it good . Good . At cognizant, were helping todays leading banks make better lending decisions with new sources of data so, multiply that by her followers, speaking engagements, work experience. Credit history. That more accurately assess a business chances of success. This is a good investment. Shes a good investment. Get ready, because were helping leading Companies Lead with digital. Good morning, again, everybody. Welcome back to this special edition of squawk box. We are live in omaha, nebraska, with Berkshire Hathaways chairman and ceo Warren Buffett in his first sitdown interview since speaking to the berkshire faithful, the 40,000 or so shareholders who convened here just across the street this weekend. And, warren, you mentioned something to me in a commercial break back before this, there is one essential factor that will determine what you think about market prices, and market valuations. What is that . Yeah, i can tell you the right question. I cant tell you the right answer, necessarily. The most important item over time, and valuation, is obviously Interest Rates. I mean, if Interest Rates are destined to be at very low levels. Not necessarily as low as they are now. But very low compared to 100 year averages or 50 year averages, it makes any stream of earnings from investment worth more money. I mean if youre the bogey is always what government bonds yield. And you see it with real estate. Real estate yields adapt. Quite quickly and fairly directly with Interest Rates appropriately. But stocks dont do it as much. But its the same principle. Any investment is worth all the cash youre going to get out between now and judgment day, discounted back. Well the discounting back is affected by whether you choose Interest Rates like those of japan or Interest Rates like those we had in 1982 before a sledge hammer to the economy by paul volcker. We had 15 shortterm rates in 1982, it was silly to pay 20 times earnings for stocks unless you felt that the world was going to change in a very material way. Well, its a huge bargain to buy stocks now if you knew that Interest Rates would stay at this level. And you could buy 30year bonds. In europe theyve been selling 50 year bonds. People are making a judgment every day. The yard stick is there. Its just a question of whether you believe the yard stick or not. But that that is something we dont like to incorporate into what well pay for a business. But it is incorporated in the market. Its not fully incorporated in the market. The stock market is dirt cheap now, if these Interest Rates were guaranteed for 10 or 15 or 20 years, and of course, a 20year bond, that you are in a sense making that kind of commitment. But thats the big thats the big thing thats the big thing investors have to think about. When you start thinking about that, ben bernanke was on with us just a week ago on squawk box. I saw. And he talked about how he thinks Interest Rates are going to be much lower for a long time to come. Its kind of the new normal theory around 3 or so. Does that sound like something that you would buy into . Well its something id consider. But nobody thought we were going to in 2009, nobody thought we would have a recovery like weve had, an employment coming back a couple hundred thousand a month, month after month. I mean the economy is doing well now. And, i dont think people thought we were going to have that for seven or eight years and rates only inch up as much as they have. Now, in part i do think thats because europe is so low that the agree of difference you want to have from there and the consequences with the dollar, and then the consequences for export industries, all kinds of things enter into how large a differential we really would want from a place like europe. But, nobody thought japan, you go back 30 years ago, nobody thought japan was going to have these rates 30 years hence. And i didnt think in 2009 we would have these rates seven or eight years hence. Ben bernanke said the same thing. That he didnt think rates would still be this low. And if there is something about this world that is going to cause Interest Rates to be very, very low, stocks will look very cheap and i will have passed up buying some businesses i should have bought. Weve had a guest on who posited he thinks that Interest Rates will go back to zero percent sometime in the next five years because he thinks well hit a recession and when you realize how long it has taken us to build up theres not a lot of dry powder there. Its not outside of the realm of possibility. Well have recessions from time to time. But we had a recession when rates were 15 too so i dont think anybody can predict them. I certainly dont think i could predict them. I obviously have ranges in my mind and all sorts of things. One thing i know is i dont like them. From the standpoint of investing berkshires capital. I will pay more you dont like treasuries you mean . Well, theyre a big, big, big drag on returns. Right. And i will pay more for businesses when they are this low after ive sort of become used to this. I dont think its unthinkable that they stay low for a very long time. And by low i mean 100 basis points higher than where they are now. And its its the big variable for investors i think. You said you have a range in your mind that you kind of keep out. What is your range that youre thinking now for how many years . I would say that anybody that prefers bonds to stocks is making a big mistake. Ive been saying that year after year after year. I dont i wont say that under all circumstances. But, it is ridiculous in my view for somebody to buy a 30year bond and some countries 50 year bonds and so on, at these rates, in preference to buying stocks. Stocks will bounce around a lot more and they can go down 50 but a 30year bond can go down 50 , too, at these rates. Bonds are a terrible choice against stocks and ive been saying that a long time. Its just dictated by analysts. Warren again, thank you. For your time. We have more to come, and joe well send it back to you to tell everybody what is next. Yep. Thanks, becky. Coming up Berkshire Hathaway vice chair Charlie Munger, and microsoft cofounder bill gates will join becky live alongside the oracle of omaha. Were going to talk all kinds of Different Things, markets and tax reform, health care, among other things. The futures at this hour have been not a lot happening, but the dow continues to be in the red. But just fractionally. The s p up a little and the nasdaq up four well be right back with more from Warren Buffett and company. To know if the customer app will be live monday. Can we at least analyze customer traffic . Can we push the offer online . Brian, i just had a quick question. Brian . Brian. Legacy technology can handcuff any company. But yes is here. Youre saying the new app will go live monday . yeah. With help from hpe, we can finally work the way we want to. 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Berkshire hathaway cochair Charlie Munger and microsoft founder bill gates join me live. Their take on the markets, tax reform and health care. A special hour of squawk box begins right now. Live from the most powerful city in the world, new york, this is squawk box. Good morning, and welcome back to squawk box here on cnbc live from the nasdaq marketsite in times square im joe kernen along with Andrew Ross Sorkin. Were here, but more importantly, becky quick is live in omaha with Warren Buffett, bill gates, and Charlie Munger. Were going to get to them in just a minute. But first lets get a check on the markets which we just did the markets are flat basically. The dow is indicated down four. The s p is up one, the nasdaq is indicated up about four. Take a quick look at the dollar and the story over the weekend was the election in france which put the euro to new sixmonth highs. Euro is 109 today, the yen 112 and the pound, which has repounded as well own thee brexit continues 1. 29 on the pound. On todays big stories takeover in the retail industry, coach acquiring kate spade for 18. 50 per share in cash. About 2. 4 billion in total. The hand bag maker said it expects the deal to close in the Third Quarter of this year. And it is official, cnbc Parent Company comcast this morning and Charter Communications now confirming a new operational agreement. Two Cable Companies will Work Together on wireless communication deals. But each will only sell wireless plans to its own customers, and also, by the way, means that theyve made a deal not to effectively get in to a wireless deal with somebody else for the next year, which may mean that to the extend theres been speculation about a transaction with verizon wireless, which has a partnership with both of these companies. A deal, a fullon deal probably not in the works just right now. Also another war heating up, straight Path Communications receiving a buyout bid nearly double its deal price with at t. The company which holds a portfolio of 5g technology said it received a 184 per share allstock bid from an Unnamed Company on friday. The Mystery Company offered 135. 96 per share. The at t deal was worth 95. 63 per share. No response from at t as yet. Reports out this morning though saying verizon is that Unnamed Company. Lets get back out to becky in omaha and she joins us now with two more special guests on top of mr. Buffett. Hi, beck. Joe were calling this a meeting of the minds today. Three incredibly intelligent people who are sitting down with us who have expertise in a series of some of the biggest issues facing our nation today. Charlie munger is the vice chair of Berkshire Hathaway. Bill gates the cofounder of microsoft and head of the bill and Melinda Gates foundation. Warren buffett of course is still with us. And gentlemen, i was thinking we could sit down and put all that brain power to work with some of the big issues facing our country right now. You all have spent a lot of time thinking about these issues, investing money in these issues and working on these issues. And i thought wed start with health care. Not only because the Health Care Bill passed last week in the house. Warren you made some comments about that over the weekend at the meeting and charlie you followed up with a few comments of your own. I thought wed jump right in when it comes to health care. Warren you mentioned that when it comes to business, to the nation but even for Businesses Health care is more important than tax reform is because its such a big chunk of gdp and such a big chunk of business cost. Why dont you lay out about what you think about where we stand right now with health care and what you think about the bill that was passed . Yeah, you probably hear more from Business Leaders about corporate taxes. Being causing them to fight with one hand behind their back in terms of competition. Corporate tax as a percentage of gdp have gone down from 4 in 1960 to 2 . So theyve been cut in half as a percentage of gdp. But health care has gone from 5 of gdp to 17 of gdp. And business pays a lot of the health care cost. So youve lost 12 points, and theres only 100 cents on the dollar. But youve lost 12 points now and other countries, most industrialist countries, a number of them were also around 5 in 1960. And some of those have gone up to maybe 11 or something of the sort. But in terms of costs to manufacturing, and really everything throughout the economy thats related to health care, and health care is onesixth of the whole economy, weve had a 12point movement against American Business and it continues. And i dont see anything necessarily in the horizon that would cause that number to be, i think its more likely to go up than down unless we change something fundamental. When something has happened to that extent you better not count on it reversing itself from natural causes. Theres a reason why its happening and you better attack the reason if you care about changing the course of the cost. Charlie lets get your perspective on this. You are the head of Good Samaritan hospital. Youre the chairman of good stamp air tan hospital in los angeles so you know health care on a very firsthand basis when it comes to this. The whole system is almost ridiculous in its complexity. And its steadily increasing costs, and warren is absolutely right. It gives our companies a big disadvantage in competing with other manufacturers. Theyve got single payer medicine and were paying it out of the company. Youve also said, though, that there are some incredibly good aspects about our Health Care System that youre better off being sick here than anywhere else. We have the best medicine at the top, and we invented 60 of the worlds good drugs. Were in an amazing place. But if you look at it up close, the amount of waste from overtreatment of the dying is just disgusting. Theres a lot wrong with the system. How would you fix it . I would go to medicare for all, i would police it pretty hard to keep out the fraud. Which is universal Health Care System essentially. Yeah, with more antifraud. Yet the same thing theres a lot of fraud and abuse in workmans comp system and the only way to keep it out is to be very tough on it. All the time. And of course, governments not very good at that. So you whats the incentive for the government, fighting some poor guy with a broken back . Whos like about everything, and so, its a very serious problem. But, i think we should have single payer medicine eventually and i think we should squeeze a lot of the fraud and folly out of the system. Youre a republican, so yes but im not a normal republican. How how would you get us to that point . Well, its very hard. But i think if they go to these cockamamie systems taking care of all the insurances, it just gets more and more complicated. And theres a lot to be said for having a basic Health Care Like medicare medicaid, thats for all. Bill you want to weigh in on that . Well, theres sort two issues. Theres how much money is there to help people with health care. And then are you changing the system so its more efficient in some way. And its a bit disappointing we dont have more ideas about bringing costs down. I think its a super important problem. I think a lot of both politicians and nonpoliticians should come together on that. But the issue of the taxes and access, which are also important, but theyre getting most of the debate, so efficiency even during obama years was not the primary discussion. One of the interesting things is that Kaiser Permanente, a nonprofit bureaucracy, if the whole nation had Kaiser Permanente care, the average quality of the care would go way up. And the cost would go down. So, some people are doing a pretty good job. What do they do . What is the secret . Well, they dont overtreat the dying. And they have very good internists and pediatricians that they hire right out of medical school. Its just a very good system and the people who have the Kaiser Permanente care like it. Charlie, do you worry that if we went to single payer Health Care System we would lose the good parts of our system . No i think you would have an alternative system that people could use. We already have that. We have a lot of our best doctors have opted out of medicare. They just leave the system. We have various ways that people who want to pay more have somewhat better care, they think, and of course we want that. Its a safety valve. And thats what europe has. You can opt out and buy your own. You can go to some other country and get your medical care. Or you can take the state. But nobody in any of these advanced countries, including canada, have the least interest of giving up medicare for medicine for all. Warren you pointed out and it hasnt ruined their capitalism either. Warren canada any capitalism. Warren you did point out over the weekend that our medical system subsidizes all those other nations. I believe it was you, maybe it was charlie. But in terms of innovation well i think its true. I think somebody else may have advertised that. We get paid for it. But, bill would know far more about this than i would, but in terms of the major improvements in medical care or medicines, 320 Million People out of 7 billion weve probably done quite a bit more of our share but i defer to bill on that. Bill . Well, its absolutely true that the companies here in terms of inventing new procedures, drugs, theyve done a great job. Those are sold globally. You could say theres a small factor that because we go first, and because the way the Pricing System works that a tiny bit of our medical costs do accrue to the world. Its a industry in which the u. S. Is strong, and the number of jobs in that area have actually shifted into the United States, instead of out. Its an unusual system, though. In that the innovation, and heavy research and all that is very, very, very largely concentrated on coming up with better products which wed love to have. But you dont see them handing out any awards for bringing down costs. I mean, if you have a steel business, or a Retail Business, i mean, you yurs trying to offer a better product all the time to your customer. Youre also trying to bring down costs with a vengeance at the same time. And that i dont think that exists in the medical business. And its 17 of the economy. Bill pointed out that there are two ways of looking at this. One is you have to look at the cost efficiencies to bring down the prices. The other is decide how much money youre going to be using to fund all of this. And warren you said over the weekend that your tax bill would have been 17 lower had the proposed tax plan that the house has now passed been in place last year. Oh, based on the house bill im a lot healthier than i was a week ago financially. They if the bill were enacted as written, and i dont know all of the provisions but i do know this provision although its received really a very minor amount of press, i just did my tax return a month ago. And my income tax was a little less than 4 million. And theres line 62, and theres 680,000 or Something Like that on there, and line 62 disappears under this bill. So i say 680,000 on a little less than 4 million, and i havent done anything like this. I mean i just watched those people vote in congress and i would say this, if this elimination of a tax applies on net Investment Income if you have in a couple has 250,000 a year or more of income, i think it would be very interesting for the constituents of every congressman that voted for that bill to ask question, just one question, are you above 250,000 on your adjusted gross income. And if you were, how much would you have saved from what you paid last year from this bill you just passed. Meaning that theyre voting for a tax cut for themselves personally absolutely. Anybody that has over 250 and has net Investment Income and the numbers get very big. I mean ive had years when its been a lot more than 680,000. But im 680,000 better off if Everything Else is equal just because of what happened this week. Now, it has to go through the senate, changes and a lot of other things but it was huge what they did on cutting taxes for the rich in this. I mean, if theres one clear cut message that comes out of that bill it is were going to cut the hell out of income taxes for the rich on Investment Income. Bill have you analyzed the bill, the Health Care Bill . And do you do you agree with that . Well, warrens correct, theres a tax that kicks in at a very high level of capital gain. It was the obama surcharge. The obamacare surcharge. And that goes away. So thats a super progressive tax that may not continue. It may, too. Yes. Because this has to go through the senate, and then right. Right. Becky we already have Something Like medicaid for everybody. If you were so impaired you need to be in a nursing home and youre out of assets you automatically qualify. To have your nursing home bills paid. And they dont let your doctor come by and walk by 20 beds and bill 40 to the government every three days. Hes only allowed to come by and bill very seldom. We have a system that polices the caregivers, and provides medicare and Social Security disability. If youre sick enough, you get total youre on medicare. We also weve already gone a long way toward single payer. Its not a revolutionary idea. Would you agree with that bill and warren . Do you agree with single payer idea . I personally do. I think you do have to police it. Yeah, its got to be policed. I mean you have veterans affairs. Thats like a kaiser. No, its worse. Okay, fine. Kaiser, i certainly agree kaiser is an exemplar of quality and theyve gotten incentive systems quite right. Right. It shows it can be done. Their incentive systems if im correct is they pay doctors a salary. Right. Doctor does not get rich in kaiser but he has a very nice life. Its more than 10 million, isnt it . Oh, sure. I mean this is not a small system. But the doctor has a set number of hours, hes not working what happens is they give the doctor a life. You know, you can be a woman doctor and you can work 50 hours a week instead of 90. And theyve got good people. Its a good system. Its really a successor to the Health Maintenance organization which was not policed well, but it gets rid of the incentive for overtreating. Now theyve done it, and done it really well, without any of the problems, the hmos had historically. Germany doesnt overtreat, either. They just the system is just made sensible. You talk about overtreating you talk about the way that we pay her transaction. We let the caregiver, the hospital, the doctor decide what should be done when theyre getting paid for it and naturally they decide that a lot of things should be done. Instead of caring for the outcome to try to get patients healthier and better. Charlie you mentioned over the weekend a hospital that had incredible rates for heart surgery. In redding, yes. I said that nobody goes to heart surgery better than the man who doesnt need it at all. For for increasing your success rate. But can you expand for the for the people who werent listening this weekend who didnt know about that. There was one hospital in particular. Yes. And the people shows the capacity of the human mind to delude itself. Because they were doing surgeries on totally unnecessary surgeries. And nobody died because they werent sick in the first place. And it slow volumes, and the system didnt catch it. Thats is wrong. Our system should catch one of the guys is good, goes on to Harvard Medical School hes doing a lot of good in medicine. What types of things is he saying . Well he has checklists, make few errors, incentives. He was the one who blew the whistle on mcallem, texas. Doctors up there stoatally abusing medicare. Cross referred everybody for a lot of unnecessary stuff. And so they were all getting paid very heavily. And that one little place was spending twice as much as ordinary places. And it blew the whistle on them they stopped doing it. When charlie read the article we need more of that. When charlie read that article actually you sent 25,000 to new yorker to give to the author of it just because he thought he made a contribution to society. He sent it back and i finally got limb to take it. And said give it to somebody else. Can we shift to tax reform and where you all think about this. How much time, if any, youve spent warren im guessing youve spend some time thinking about tax reform and what you think needs to happen. Well corporate lets start on the corporate. Just the word reform. Reform is usually when your taxes are cut. It will be tax change. But, whether whether its a better tax system or not depends on how its constructed. And well our taxes are the corporate taxes something that is a competitive disadvantage for american corporations. Not much. Not much. No, i cant think of any business where were in where our tax rate puts at a and were in a lot of businesses, significant disadvantage with foreign countries. For one thing ours arent as high as we think they are in many cases. Theyre not as low elsewhere you mean the actual actually taxes are 2 instead of paying 35 Many Companies are paying much lower. Sure. And 2 of gdp is not a high by u. S. Standards. And then when you compare it to 17 for health care i mean its you know, every every business person is going to go there and say our taxes are too high, and if they really try and make it revenue neutral, you know, my guess is it wont pass. Because give the people a little for whom it goes up are going to argue against it harder than the people where it goes down. I mean its great for lobbyists and all that. So if they talk about it going they always talk about it being tax neutral. Tax neutral is one way. Other people weve talked to including Steven Mnuchin and others have said look we have dynamic scoring that can bring this in and as a result we think we can bring taxes far down and not necessarily have a pay for as you go along with that. Well, everybodys gotten the idea based on the world success of printing money and not paying too much of a penalty. Everyone evidence that is a very dangerous thing to do. The fact its worked pretty well some of the time does not mean it always will. Dynamic score. Ive never seen anybody enter dynamic scoring that says that things will come out worse than just indicated by the figures. And clearly sometimes it does. Im very suspicious of dynamic scoring. Do you agree that theres some sort of a laugher curve, though, where you raise taxes to a certain point and it is the law of diminishing returns. You get taxes to 100 . Some people would work that very few now its but thats not that is not an argument for changing my taxes at all. You know, except upward. Its everybody that wants a cut in taxes, you know, they hire some am deck imics and they look for dynamic scoring and they say the country will really be better off if i pay less tax. I dont blame them, its understandable. Be very, very suspicious dynamic scoring. If we had a simpler tax code, one that would not allow for loopholes, one that would not allow Big Companies to employ legions of tax lawyers to make use of the loopholes, if it did Nothing Better than even it out if you free up labor that is now engaged in a lot of senseless procedures and put them to work in a market system in things that the market demands that is a plus, theres no question about it. Theres another issue which is the certainty of the tax code. Yep. And leaving it alone, if you create if youre constantly switching and saying no, this switch may have gotten rid of a few counts, now this switch gets rid of them, then you are getting everybody has to learn the new stuff, and uncertainty is not good, and youd like once you fix the tax system to leave it alone for a long, long time. Weve heard Business Leader after Business Leader say this is an uncompetitive situation. If youre an american manufacturer you have things coming against you. If you are a Technology Company maybe you have a lot of money that youre keeping offshore. So do you think that it would be better if the tax system were reformed . Youve been a little quieter on this. I dont think that the success of the technology effecter will be improved by some tax change the Tech Companies are not starving right now and this only comes up when you have profits and these companies have very high profits. Its not like were going to be stronger in the tech sector by making owners of those stocks richer. Apple has a quarter of a trillion dollars that its keeping much of it offshore. Would it make sense to have that money brought back to the United States . Does it matter . I would say yes it does matter. And i dont see why, we dont want people artificially shifting money to some Foreign Place to avoid u. S. Taxes. Its not artificial if youre really making the money in the Foreign Place and they dont have high taxes. Why do we care if somebody nation a lot of money in some Foreign Place and brings it back as a low tax . I think theres a lot having all this money pile up abroad and borrowing artificially, its a cockamamie system. So how do we fix it . Oh, i think they bring it back if you have a onetime forgiveness and i dont think that would hurt anybody. The tax holiday we tried that in the bush administration. Yeah and it works. Worked temporarily. Back you have a holiday, then the that encourages more investment abroad, and particularly in art fish places to wait for the next holiday. Well bring it back later on. I mean theres some countries that are very small countries that an awful lot of businesses and and if if if the consequence of doing that is you get a big braeshs occasionally, youre going to try to figure out how to do more of it. It doesnt increase investment in the United States, it increases investment in some place youve got a low rate. Come down hard on all that stuff where you shift some patent that was invented here, send it over to liechtenstein, and collect all the patent royalties. Its gaming the system. But assuming you actually have made the money abroad, and the taxes abroad are low, i dont see impose a big tax on them when they bring it back. Charlie, you would be a pretty strict dictator if you were running things, wouldnt you . He certainly is a berkshire. I dont like fraud runs rampant. It just feeds on itself like cancer. So youve got to constantly bliss it. And a lot of people just wont do the work. Its a huge mistake. Because youre ruining your country, as everybody gets sucked into the fraud and they do it because everybody else has been doing it. So im a great believer in coming down hard on that stuff. Way harder than the government does and other people do. Kind of like singapore . Yes. Well, im a big admirer of singapore, youre right about that. Caning. Well, hes also in charge of Public Relations at berkshire. Bill, just in terms of caning actually leaves a scar. Its quite serious. I never noticed that. Havent looked at a munger bill. Bill, very quickly, just the the idea of a constant tax code as you mentioned. A holiday, a tax holiday doesnt necessarily lend into that idea and im guessing youre getting at the idea that American Businesses want to know what the rules of the road are before they will invest. On a long period over many, many years. Yeah, a lot of government policies, including taxes, you want great predictability, and so it will be interesting to see what they do. The overseas money, although its kind of a complicated thing, its not its not like when that money comes to the u. S. , people will Start Building factories that they werent building otherwise. It doesnt change the the profit potential of Capital Investment more likely to do something with it. Yeah but governments already lent us or its lent to xyz corporation, in other words when companies go to the market in the United States, foreign subsidiaries of of companies that have socalled trap cash buy those bonds i mean so it actually goes from a industry that doesnt have much use for the capital of somebody that really does have some plans for the capital under the present system. Gentlemen, if youll bear with us for just a moment were going to slip in a quick break. When we come back well have much more from Charlie Munger, bill gates and Warren Buffett. 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Welcome back to a special edition of squawk box where we are live in omaha, nebraska, with Charlie Munger, Warren Buffett, and bill gates. We are calling this a meeting of the minds and trying to tackle some of the big issues facing our nation and our world today. Weve already spoken about health care here in the United States, and the tax reform that is under way. Bill i thought we could talk a little bit about the budget process. Because this is something that matters to you at the Gates Foundation. You spend what about 5 billion a year in programs trying to improve peoples lives . I think theres Something Like 122 million childrens lives that have been saved through vaccinations and nutrition provided by the Gates Foundation over the years. When we start hearing things about cuts in the state department, and 18 cut to the state department budget, what does that mean . What would that happen what would happen to the prong epts that you have worked on over the years . Whats amazing is the success that our foundation working in partnership with the u. S. And others has had at improving health, and that helps stabilize these countries so that they can get out of their poverty trap. It also lets us see any Health Problems like a pandemic coming out of those countries so we can protect americans from that. There was a proposal that the state department would have been cut 28 , which for these Health Related things would have been much bigger cut, and so were glad that you know, looks like the Congress Wont make those cuts because they dont think were so weak that we need to withdraw the malaria bed nets or the hiv medicine. Im very lucky that i get to go and see the Great Success and then, you know, say to the u. S. Taxpayer, hey, we are performing miracles here. 122 million childrens lives saved, over 10 Million People who are alive because we helped provide the drug, the hiv drug, the program that started under president bush. So i think were Strong Enough to help stabilize these countries, see the pandemics early, and i think that congress will maintain these investments, so i just think thats very smart. We are getting close to a goal that youve been after for some time, which is the eradication of polio. How many cases this year . Weve had five this year. Every day i get up, you know, check to see if there was a new case. Right now all the cases are in pakistan, afghanistan. Were still making sure in nigeria, where boko haram is, were still a little worried, have we missed some cases there. But those are the two hot spots, and so with luck, this will be the last year where we have any cases. If you go a year with no cases, then its declared eradicated . How does that work . Actually they make you go three years. Which is wise, because they want to make sure you dont miss any, and so we start that threeyear clock at the end of this year, if things go well. Which right now, its on track. Ill be going to rotary for their 100th anniversary in june and congratulating them, because theyve been very involved in this, and their workers have volunteered. Theyve raised resources. Theyve spoken out there. Theyre one of the big heros in this whole effort. You know, there was a big shift i think in overall thinking the election this past election reflected that. Americans are worried about their own jobs. Theres big chunks, swaths of the country where they feel like jobs have left. They have not been replaced. And warren we talked about this a little earlier about job Training Programs that havent been there. People who have suffered through these issues of job losses here in the United States probably look at it and say, we need to take care of ourselves instead of looking abroad. Charlie, what do you say to people like that . Well, theres a long tradition of americans going after the worst poverty and disease abroad. John d. Rockefeller was one of the best philanthropists that ever lived and bill is following his example place after place. Rockefeller saved more damn lives, and of course rockefeller has helped bring in the miracle grains good record, and and what i like about what gates and buffett are doing is theyre tackling stuff that other people dont. Joe has a question, as well. Joe . Its on this topic. And its for bill gates. I promised id ask this question for a judge that runs a school in one of the poorest parts of the world. And i think youve kind of answered it already. If you have Health Concerns its hard to have education but this point is that he wishes you would focus even more on education. He says that poverty is a bigger concern than health. And the problem is that the economy is too small for the number of people in it, theres no way to do anything about, you know, these lives that these people have unless you grow the economy. So his point is that you get a better return from education than maybe from health care. But i think youve already answered it. Its hard to get an education if youre dealing with health problem, as well. Its a chicken and egg thing, i guess. Thats right. You really need both. If a kid is malnourished, theyre not developing either their body or their brain. So first its health, then its ink indication, then third its a government that creates opportunity. When those three come together you get out of this poverty trap. And so the u. S. Government funds weve been talking about, some of those do go to international education, and thats why a lot of aid recipients like india, brazil, mexico, or even south korea in the 1970s, they have gotten out of poverty and now theyve turned around and theyre contributing. We need to do that same thing for the poor countries in africa. Warren, you spent i believe 2. 9 billion that you gave back to the Gates Foundation last year and the other four Family Foundations that you have. This has been several years, many years that youve been doing this. I know you you believe very strongly in the foundations cause, trying to make sure that all people have healthier and improved lives. But, when you start thinking about that its massive amounts of money that you all are spending on this. But why is the government money so important to go along with this . Can philanthropists just do it by themselves . 5 billion is a lot of money. But if youre talking about percentages of budgets, bill can give you better figures on this. The United States actually lags behind a number of countries in terms of the percentage we use for foreign aid and that sort of thing. But, the answer is, we would all three of us were so lucky to be born in this country. I mean its incredible that as has been accomplished here, and that can be maybe not replicated 100 around the world. But but but if you believe every life has equal value, i believe that, bill believes that, melinda believes it, my children believe it, the question is what can you do to push that along so not only does every life have equal value but every life has equal opportunity. And Health Enters into that, obviously, is huge. Governmental policiepolicies. Educational. Health is the one that you can see the impact on. Bill can give you the figures on the number of kids 5 and younger that die every year in the world has been cut in half in 30 years or Something Like that, bill, and his goal was to cut it in half again. Just think of the difference. I mean, you have children of your own, you know, how would it benefit if they lived in some terrible part of the world. So, its just seems obvious that that you help people around you and you help people around the world. Bill, you youre a bit of a statesman. You traveled the world. Bringing this mission to other countries. You also probably spent some time in washington. What what have you what have you thought in terms of what washington is thinking these days about foreign aid missions . Well the history is the u. S. Has been generous, not to the level of other countries, because we have a large economy, in absolute we give the most. So its 30 billion a year going out to help these poor countries. Germany and the uk are tied for second at about 18 billion each. And so the scale of Government Resources is what lets us get the bed nets and the hiv medicine out there. Philanthropy alone couldnt do it. I can try out new things in an innovative way, but only that government level generosity let us achieve these incredible goals. And as ive met with the congress, ive been impressed that at the commitment to continuing this by both parties. Have you spoken to rex tillerson, the head of the secretary of state . I have, and im sure ill be talking with him a lot more. Because were in partnership with the part of the state department called the usaid that is delivering that 30 billion. And were always getting smarter about how we measure it. How we do it in a smarter way. And so, hell be a key partner for us. Okay. Were going to slip in a quick break right here. Well have much more coming back with these three gentlemen in just a moment. We should also point out tomorrow on squawk box, dont miss House Speaker paul ryan. He will be live at 7 00 a. M. Eastern time. Stay tuned. When we come back we have more from Warren Buffett, Charlie Munger, and bill gates. Squawk box will be right back. Most etfs only track a benchmark. Flexshares etfs are built around the Way Investors think. With objectives like building capital for the future, managing Portfolio Risk and liquidity and generating income. Thats real etf innovation. Flexshares. Built by investors, for investors. Before investing consider the Funds Investment objectives, risks, charges and expenses. Go to flexshares. Com for a prospectus containing this information. Read it carefully. The shlike a bald penguin. How do i look . [ laughing ] show me the Billboard Music awards. Show me top artist. Show me the top hot 100 artist. They give awards for being hot and 100 years old . Well take 2 [ laughing ] xfinity x1 gives you exclusive access to the best of the Billboard Music awards just by using your voice. The Billboard Music awards. Sunday, may 21st eight seven central only on abc. Welcome back to squawk box everyone. We are live in omaha, nebraska this morning with Warren Buffett, Charlie Munger and bill gates. Weve been talking about a lot of different issues this morning, one thing gentlemen our viewers are always keen to hear are your insights into the markets. What you think about things. Warren already told us this morning that he thinks Interest Rates are the one key factor that determine whether markets are valued too rich or not. And just wonder if you two could add some comments to that. Bill what do you think about the markets valuation these days . Well the multiples are fairly high. And thats because as one says its all bench marks to the Interest Rates. So, Interest Rates go up a lot, youd expect some retreat from these levels. Charlie when you look around, is it hard to find deals these days . Of course. Is it hard to find opportunities . Of course its hard. We have an army of people in finance and weve got an army of people in socalled shadow banking, who are financing these deals by any companies that want it. With a liberal leverage. And of course they pay high prices. They get part of the upside and they dont take any of the downside and they get fees off the top so its fee driven buying and its very extreme. Of course it makes it hard for us to buy companies. Do you find more opportunities in the United States or else where right now . Well, were not we have long periods where we dont go much anywhere. Were taking up space now. Thats our weve run out of opportunities. Thats why we have so much in the way of treasury bills. 95 billion roughly cash and Cash Equivalents. We dont like that. But, but there are times in finance when people just throw the money away. And so a lot of idiotic deal making in Venture Capital now. And theres a lot of idiot we had some big recession. I think a lot of us labor finance was under a lot of agony. Do you think so i dont think that the future is just guaranteed to be all rosy. Do you think a recession is in the cards . No, i dont think any of us know. Anybody that isnt modest about his theories about economics hasnt been paying attention the last eight years. People have been utterly surprised in things they deeply believed were fixed and werent fixed at all. Who would have guessed we could invest all this money and not have any inflation. Do you think weve gotten out of this . Or is this still a movie that has yet or do you think that this is still a movie that we havent seen the ending on yet . I think its always a movie we havent seen the ending. One thing you know is there will be good stretches and bad stretches in the future. All three of you are in the positions youre in because you have had phenomenal successes in investing and in business but you didnt get there without some hiccups along the way. Yeah, we got ahead. Were pretty conservative. I ask this just because warren has talked about this worst trades in the past. And warren i believe you said it was Berkshire Hathaway that was your worst trade. Yeah but i had plenty of other competitors. The three basic businesses, the three companies came together for berkshire actually, diversified retailing, and the base companies of both of the other two totally failed, disappeared. So were three for three in terms of our building blocks. We thought they were okay at the time, didnt we . We bought them so cheaply that we could return them more money than we paid and then we took the money and bought these other companies. So, it wasnt as though we lost big chunks of money. Its just that it was such a dumb way to do business scrambling around with those unfashionable dying businesses, tech tile mills in new england. The power costs in the south in the tva companies were 60 lower than new england, textiles is a congealed piece of electricity. What kind of an idiot would go into textiles in new england . The guy on your right. Charlie, if you had to go back to the years, what would you quantify as your worst trade that youve ever that youve ever made . Well, way back, i could find you trades when i converted old bonds, and you know, you go back to the very earliest munger struggling for revenue there have been some dumb trades. Every smart guy is tempted by leverage. And some of them are broken by it. And its somewhat capricious in terms of which ones get broken. Wouldnt you say, charlie . Sure. And charlie came close. Is there one that stings in particular . Is there one that s particular . Well, every failure stings. It took a long time. I made a tech Company Investment and we damn near went broke. We hovered on if edge the edge of the precipice for three or four years and it was agony, and a lot of money to me at the time. It was a pretty good problem but it wasnt the worlds smartest investment. It took a lot of intelligent scrambling to rectify the situation. Im not looking to repeat the dumb decisions that got me there. Well find new ones. Yeah. We will. Bill, how about you, whats the worst trade you ever made or one of . Well, my expertise or purported expertise is more in software. So things like, you know, my role in not having microsoft lead in search or not lead in the phone operating systems. Or in the cloud. Right. But were number two there. Yeah. We started five years late. Yeah. So those are the ones that i think about at night more than stock trades. I do have a heavyweighting in terms of the Investment Team i work with in mexico. Were not looking too smart right now. But im optimistic that well turn around quite well. I think you have a question as well. Becky, really this question is for warren. It comes from a number of shoulds who shareholders who sent in questions, meaning that we, meaning becky and i, missed asking what your views were on donald trump and his performance thus far as the president when it relates to the economy. So i thought id ask it straight up. Well, i dont think hes had an effect on that much of the economy. I said a year ago at the annual meeting, much i was 100 for hillary and did a lot of fund raising and all of that sort of thing and discussed with some of my friends. I said i thought berkshire would do fine under either person as president. And, now, that doesnt mean you cant have recessions under either one, but the president is probably over the presidency is its the most important job in the world but its overemphasized in his relevancy to stock market fluctuations or even Business Pros persperity. Well see how it plays out. But i dont make investment or Business Decisions based on who is president or who i think is going to be president. And warren wait, we ever excuse me. Go ahead. No, one followup came from im shareholder who asked, given that well, ill read it to you. Given the many ceos who are supportive of trump and seem to are his ear now as president , do you think your support of hillary has had any impact on berkshires policy . No, i never called a president in my life. Never. And i never really sent messages to a president through a cabinet member or anything of the sort. So and obviously, i have not done so with trump either so our and i never Berkshire Hathaway parent now, the subsidiaries, they have specific interests in railroads or utility, they have employed lobbyists and made contributions. Berkshire hathaway parent has never to my knowledge employed a lobbyist and certainly has never made a contribution in 52 years to a political candidate from the dog catcher up to the president of the United States. My idea is that generally theres way too much hatred in american politics and that the parties hate each other so much they both get quite irrational. I try to avoid that kind of dance hatred. Why should you expect perfectly rational behavior from a politician, whether on the left or the right . And what is so constructive about this miasma of hatred which you see all the time . Its quite counterproductive for the country and all of these politicians are partly right. I think trump was exactly right when he said he ought to get along with china and he stopped talking about trade all the time. He frequently does some learning thats quite admirable. In terms of learning, gentlemen, if three of you have the three of you spent an awful lot of time together and you learn from your mistakes and from each other. Is there something that you can say that you have learned along the way, warren . Id be crazy if i people like charlie and bill, and wasnt learning. I mean, thats been the part of the great fun i have had with both of them. I have known them both a long time and when we have the annual meeting and charlie sits down next to me, im going to learn something during the unsuing few hours and the same thing when i met bill, we were there 10 or 11 hours and we were regarded as antisocial by the governor of washington because we couldnt come out. I couldnt think of much more fun than learning from other people. And these guys are you know, theyre unlimited resources in that way. Theyre much broader than i am and so i have got way more to learn from them than they have from me. I take advantage of it. What did you learn from charlie yesterday sitting next to him . Charlie two days ago i should say. Id have to go over it, but i guarantee you i did, becky. Just this morning when talking about, you know, the essentially kaiser. These are things i know about, but it helps to hear charlie articulate thoughts on it and helps when bill articulates thoughts on what can improve the world. Bill, how about you . Well, its been really unbelievable for me to have the friendship with first warren and then charlie as well. Because they come at things from more of an Economic Business point of view, and im more on the technical side the fact that we often see things the same way is kind of amazing. And, you know, the worlds unfolded in all these surprising ways. Take the financial recession. People still dont understand that, but as i sit and i talk to the two of them, i get a sense of okay, what would make that happen again. Also, even beyond numbers, just the way they think about people, the way they think about integrity, setting an example. I am a much better manager because i have known the two of them. Charlie, you mentioned over the weekend that your wife wondered why you were spending so much time being so impressed with a young guy, Warren Buffett. Because he didnt make me eat the carrots. Or broccoli or spinach or brussels sprouts. I think thats unusual in a young man. Wonderful wife. She was she wasnt automatically in favor, operating from the sun porch. She came to appreciate you, but it wasnt immediate. Oh, i appreciated her immediately. With better reason too. What have you learned from warren and from bill over the years . We have all learned a lot from each other and from the world. Its amazing how having worked so hard to learn how much we dont know. We dont know whats going to happen inflation five years out. We dont know whether well have another recession. We know were going to have another one, just when. Yes. Yes. And i do have one mildly controversy, well eventually get Single Payer Health care and that is that my fellow republicans who want to take away all this regulation of the major finance, i think thats bonkers. I think that if youre using the governments credit to maintain your deposits you should behave in a pretty standardized way. Let those who want to swing for the fences get into their form, but i dont want too big to fail fences. I think they have to do it they have to behave conservatively. Berkshire behaves conservatively. We could have made so much more money by being more leveraged. Do we really miss it . I dont think. What difference does it make if warren has another few Million Dollars . The argument s in rolling bak the regulations on the bank that as a result its tougher for businesses to get access to credit, its tougher for consumers to get access to credit and that slows down the economy and hurts consumers and businesses along the way. Yeah, but they like the frenzied finance. Some of the normal finance they worry about. It ask true that some of the new it is true that some of the new regulation has taken the bank out of leveraged buyouts directly and that we have shadow banking instead to do that. I think thats fine. Whats wrong with the shadow banking . Well, because you waited for the last two minutes for that controversial thought we dont have more time to push you on that so well let you have the last word on it. Warren, charlie, bill, thank you very much for your time today and we appreciate it. We appreciate your generosity with your time. Thank you. Thank you. That does it for us today. Join us tomorrow. Right now, its time for squawk on the street. Good monday morning. Welcome to qsquawk on the street, im Carl Quintanilla with jim cramer and david faber. Well recap everything from this morning, set up for a busy week in earnings. Europe slightly red as the tension attention turns from macrons victory to the parliamentary elections in june. And our road maps begins with the oracle of omaha speaking out