Charlie Munger's 2023 Recession Prediction

Visits partly fraud and partly delusion; that's a bad combination. I don't like either fraud or delusion, and the delusion may be more extreme than the fraud. This is a very, very bad thing. When Charlie Munger talks, we all better listen.

Munger is the business partner of legendary investor Warren Buffett and vice chairman of Berkshire Hathaway. Charlie has a net worth in the billions of dollars, and he's never been one to be afraid to speak his mind. That, combined with the fact that Munger rarely gives interviews, makes what you are about to hear a special treat. Charlie talked and shared his wisdom about everything from the potential of an upcoming recession, the U.S. Federal Reserve, Tesla, and of course, Bitcoin.

So let's jump into the interview. But first, make sure to like this video and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Here's Charlie.

"I basically like the existence of a Fed. I think in a world of quiet currencies, we need wise central banks. And if you look at Japan today, you would find that the federal bank has made our central bank okay, a little mouse that hardly tries to do anything. So we've learned that central banks can be really important; you can push them to great access if you have to in enough trouble. So by and large, I like central bankers, and by and large, I hate Bitcoin promoters." [Laughter]

"When you say that we look like a mouse compared to Japan's central bank, is that a good thing? I mean, look what's happened to Japan."

"Well, yeah, it's really—we haven't had to try it. But are we getting the kind of trouble Japan was in? Of course, we'll do the same damn thing. Do you worry about the FED creating a recession by slamming on the brakes too hard?"

“Well, I think the FED is willing to have a little recession in order not to have other control inflation. That's what they're supposed to do. They're supposed to be the one guy at the party that doesn't hang around while everyone else is getting drunk, although a lot of people say they're the ones who provided the punch bowl. Well, I think that's pushing it. And besides, I think we were in enough trouble when this thing started; the FED hadn't done what it was very aggressive. We would have had one hell of a mess, which would have been way worse than what we have now."

The United States Federal Reserve, or FED for short, has been at the center of attention the last couple of years, and this isn't good attention either. Many people blame the FED for the highest inflation the U.S. has faced in 40 years and the slowing economy.

For those of you who may not be familiar, the FED sets interest rates, manages the money supply, and helps regulate financial markets. The actions the FED took in early 2020 were truly unprecedented. The FED lowered interest rates to essentially zero in order to help the economy avoid entering an economic collapse, as businesses across the country were closed, and millions of people became unemployed virtually overnight.

By lowering interest rates, the FED made it less costly for businesses and consumers to borrow money to then turn around and spend and grow the economy. This, combined with massive government stimulus programs, helped keep the economy strong and avoid the economic collapse that probably would have happened.

In the clip, Charlie acknowledged that this course of action was necessary. However, where the FED may have gone wrong is that they have been too slow to return interest rates to more normal levels. The FED kept interest rates at zero throughout all of 2020 and 2021, despite the fact the economy was incredibly strong.

Here's an analogy to think about the FED's job: Imagine a party with hundreds of guests that want to have a good time. Picture a large punch bowl filled with the best-tasting adult beverage out there; the bowl never runs out. As the night goes on, everyone keeps partying and having a great time, all the while drinking more and more out of that punch bowl.

At a certain point, things are going to get a little crazy. It's the FED's job to be the one to step in and take away the hypothetical punch bowl before it's too late and there's no going back. In 2020 and 2021, the party was full blast in the stock market; stock prices were skyrocketing, backs and meme stocks were getting that front-page headline. Day trading had become popular again; stocks with little in the way of sales and no path to being profitable were selling for crazy prices.

People were calling Warren Buffett and Charlie Munger outdated because they stayed on the sidelines. There's a sense that stocks only went up. Going back to our punch bowl analogy, the longer the punch bowl is left out, the worse the hangover is going to be, and that's what we're seeing in the economy right now: the aftereffects of the hypothetical punch bowl being left out too long.

Inflation is at the highest rate in decades and is the number one concern for Americans. In order to get inflation under control, the FED is now aggressively raising interest rates to make up for lost time. By increasing interest rates, the FED is making it more expensive for banks, and therefore consumers and businesses, to borrow money. For consumers, higher interest rates mean it's more expensive to buy big-ticket items that are typically purchased with credit, such as homes, automobiles, furniture, and large appliances.

For businesses, this means purchasing less new equipment or holding off on making upgrades. Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices.

There is one big drawback of attempting to get inflation under control: the FED is doing a balancing act. On the one hand, they want to make sure they slow down the economy enough to get inflation to a more normal level, but at the same same time, they want to make sure they don't send the economy into a nasty recession by raising interest rates too high or too quickly.

The FED is publicly committed to do whatever it takes to get inflation reeled in. Jerome Powell, chair of the Federal Reserve, is like a pilot trying to land a large plane on a tiny runway in bad weather. There are two potential outcomes. The first is the so-called soft landing. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation while at the same time avoiding a severe downturn.

The other potential outcome is a hard landing. This is where the FED is too aggressive and it actually sends the economy into a deep recession while trying to get inflation under control. A hard landing would have long-lasting repercussions; people would lose their jobs, businesses would close their doors, households would see the value of the assets they own, such as stocks and real estate, decline in value.

The FED and Jerome Powell are playing a high-stakes game but have no choice, given that sky-high inflation has backed them into a corner and forced them to act.

Now, it wouldn't be a Charlie Munger interview if you didn't get his, let's just call it, candid opinion on a wide range of topics. Two comments stood out in particular: his comments on Tesla and Elon Musk, and his not-so-kind words about Bitcoin.

Here's what Munger had to say about Elon Musk and his company Tesla: "I was certainly surprised that Tesla did as well as it did, but I do not equate Tesla with Bitcoin. Good luck; Tesla has made some real contributions to this civilization. Elon Musk has done some good things that other people couldn't do. We haven't had a successful new auto company in a long, long time, but what Tesla has done in the car business is a minor miracle."

Now, Charlie Munger and Elon Musk haven't been the biggest fans of each other. In fact, Musk has told the story that back in 2009, both he and Munger attended the same lunch together and seated at the same table. Munger then proceeded to spend the next hour or so telling everyone at the table why Tesla would fail, all right, in front of Elon. Now, Munger doesn't remember this lunch, but Elon confirmed that it did happen.

Now, this shows that the encounter left a bigger impact on Elon than it did on Charlie. It wouldn't be a Charlie Munger interview if he also didn't talk about how much he hates Bitcoin. As usual, he didn't mince words: "It pains me that in my own country I see people that were once regarded as very reputable people helping these things exist, promoting their goose and so forth. This is a very, very bad thing. The country did not need a currency that is good for kidnappers and so on. I think they actually mean well. Though, that you're seeing a lot of delusion. It's partly fraud and partly delusion. That's a bad combination. I don't like either fraud or delusion, and the delusion may be more extreme than the fraud."

"Delusion—how so?"

"Nobody's going to build a new thing that every 12-year-old kid can be a billionaire or something. He just calls it Mungercoin; he starts trading it or something. It's crazy; it's demented."

To understand why Charlie Munger dislikes Bitcoin and cryptocurrencies, you have to understand the key differences between what he calls a productive asset and a non-productive asset. A productive asset is something that generates cash for you beyond just you eventually selling the asset one day.

Let me explain what I mean. Let's just say you own a farm. At the end of each year, that farm will have generated crops for you that you can then sell and convert to cash. At the end of each year, you will have a pile of money and the asset—in this case, the farm. The same is true for an apartment building. At the end of the year, you, as the owner of the apartment building, will have received rent from your tenants, and you will still own the building.

Stocks are another example. When you buy a stock, what you're really buying is a small ownership stake in a business. That business is hopefully going to generate cash flow that you are entitled to as an owner of the business. You see where I'm going with these examples? The value of productive assets, or any asset for that matter, is based on the cash that asset will generate for you over its lifetime.

Non-productive assets are things that the only way you make money from is when you hopefully sell it to someone else for a higher price. Gold and silver are examples of this. You buy an ounce of gold, and it doesn't produce anything for you while you own it. You are at the mercy of the market price for that asset; your only hope is that the price of that asset will increase over time. The only time a non-productive asset will produce cash for you is the day you sell it.

This is why Warren Buffett's productive asset will almost certainly generate higher returns than a non-productive asset over a long enough period of time. Bitcoin falls in the category of a non-productive asset.

Charlie Munger's comments about Bitcoin being worthless sure do get a lot of headlines in the media. The reason he calls Bitcoin worthless is because it doesn't produce anything for the owner of it. Since the value of an asset is the cash it will generate over its life, how do you value an asset that doesn't produce anything?

So, there you have it. Make sure to like this video and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Make sure to also check out this other video that I think you'll like. Thanks for watching, and talk to you again soon.