Warren Buffett: America's 'Incredible' Days are OVER

America's Incredible Days Are Over, and those aren't my words. This is coming directly from legendary investor Warren Buffett, and at 92 years old, let's just say he knows a thing or two about what it's like to see an economy shift from boom times into a recession. Buffett's also the CEO of Berkshire Hathaway, which is a holding company that owns hundreds of different businesses and employs nearly 400,000 people. Being CEO at Berkshire gives Buffett an inside look into the health of the economy, and spoiler alert: he's not liking what he's seeing. So make sure to stick around to the very end of this video to hear what Buffett recommends you should do to protect yourself from the economic dangers that lie ahead.

Here's Buffett going through his company's financials and how it's flashing warning signs for the economy. Next, move on to the earnings in a couple small slides that explain what we're all about, and then we're going to get to the Q&A. The slide is up behind me—yeah, there it is. We reported in the first quarter operating earnings a little over 8 billion. When we talk about operating earnings, we're basically referring to the earnings of Berkshire Hathaway as generally well as required under GAAP, excluding however capital gains, both realized and unrealized. There are a few other very minor items, but basically we expect to make capital gains over time. Why would we own the stocks otherwise? It doesn't always work out, but overall it works out pretty well over time.

But in any day, any quarter, any year, even occasionally over a five-year period, the stock prices move around capriciously. Now, we own a lot of other businesses; we consider those stocks businesses. We own a lot of other businesses where they get consolidated and they don't move around in value. Now if we had a little bit of Burlington stock outstanding, if we had a little bit of the energy stock trading, those stocks would move around a lot, but the businesses are what count.

So the operating earnings, as you'll see, in the first quarter came in at about 8 billion, and I would say that in the general economy, the feedback we get is that I would say perhaps the majority of our businesses will actually report lower earnings this year than last year, in various degrees. In the last six months or so, at various times, the businesses have left the incredible period, which is about as extraordinary as I've seen in business since World War II.

With the government pouring out a lot of money to people who couldn't get goods, it was more extreme in World War II, but this was extreme this time. It was just a question of getting goods to deliver, and people bought, and they didn't wait for sales. If you couldn't sell them one thing, they would put another thing in their backlog. It was an extraordinary period, and that period has ended. It hasn't ended with— as you know, it isn't that employment's fault or off a cliff or anything in the least, but it is a different climate than it was six months ago.

And a number of our managers were surprised; some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren't in the same frame of mind as earlier. According to Buffett, the last few years have been some of the strongest economic times in his nearly 100 years of life.

In order to prevent a complete economic collapse in the spring of 2020, the U.S. government and the Fed took drastic steps to stimulate the economy. Stimulus bills approved by Congress unleashed the largest flood of federal money into the United States economy in recorded history. Roughly five trillion dollars went to households, mom-and-pop shops, restaurants, airlines, hospitals, local governments, schools, and other institutions around the country. Those that lost their jobs received the normal unemployment benefits along with an additional 600 a week. Individuals making less than $75,000 a year or $150K for married couples were sent multiple stimulus checks that combined added up to be worth thousands of dollars.

Those with student loans had their monthly payments paused, and considering the fact that there is approximately 1.6 trillion dollars of student debt in the country, that was saving people hundreds of dollars a month in payments. All of these unprecedented actions led to one thing: U.S. consumers having more money in their pockets. And if I know one thing, it's that U.S. consumers love to spend money, and spend money they did. This fact, coupled with the Fed cutting interest rates to zero, led to a ton of money floating around in the economy.

At the same time, supply chain issues led to a shortage of many goods. Consumer demand for goods outstripped the economy's ability to actually supply them. So when demand outstrips supply, we are left with everyone's least favorite nine-letter word—yes, that's right, you guessed it: inflation. Inflation shot up to its highest level in 40 years, and once it became clear to the Fed that this inflation was here to stay, they had no choice but to act in order to get this inflation under control. The Fed raised interest rates at the fastest rate in generations. Higher interest rates caused the economy to slow, and that's what Buffett and his companies at Berkshire are experiencing.

The businesses that Berkshire Hathaway owns are a barometer for the health of the economy. Take a look at some of them; many of these companies help Buffett get a feel for what's happening in the economy. There's Geico—here, Buffett can see how many people are driving their vehicles, and generally speaking, more miles being driven is a sign of economic strength. He can also see how many people are paying their car insurance bill on time. Then there's Benjamin Moore, Clayton Homes, Acme Brick, and Johns Manville. These companies earn in the construction and home building industry. When the economy is going wild, people and companies are willing to spend money building a new house to live in or a new space for their business.

Berkshire also owns the old-school fast-food restaurant Dairy Queen, where it can see if people still have extra money to go out to eat and splurge on the Dilly Bars he loves so much. Finally, there is the single most important business on this list when it comes to judging the health of the U.S. economy: the railroad BNSF. BNSF carries goods throughout the Western half of the United States. These goods range from cars to coal to grain to even the trailer full of random stuff that you see semis pulling on the highway. The stronger the economy, the more stuff that's getting produced; and the more stuff that's getting produced, the more car loads full of goods that the railroad moves.

When the railroad starts to move less goods, that is a telltale sign that the economy is slowing down. The economic slowdown that Buffett's talking about is reflected in his company's numbers. So here we have the sales and profit numbers for Berkshire's manufacturing businesses. We can see sales in the building products category fell by nearly 11 percent in the first three months of 2023 compared to the year before. Even worse, pre-tax profits fell by roughly 22 percent. This construction category consists of manufactured home company Clayton Homes, roofing products company Johns Manville, bricks and masonry products company Acme, and paint company Benjamin Moore.

These companies are highly dependent on a healthy construction industry. The construction industry was booming in 2021 and 2022. Home prices had skyrocketed at all-time low mortgage rates dramatically increase buyers' purchasing power. Home builders simply couldn't keep up with all the demand. However, based on these numbers, it's clear that the construction industry is slowing down.

Construction is a major contributor to the U.S. economy. The industry has more than 750,000 employers or companies with over 7.8 million employees. The industry creates a staggering 1.8 trillion dollars worth of structures each year. Construction is one of the largest customers for manufacturing, mining, and a variety of services. So it's only a matter of time until the slowdown in construction starts to have big ripple effects throughout the economy.

Results in the consumer businesses have been even worse; sales fell by nearly 20 percent in this category, and that's nothing compared to the decline in profits. Pre-tax profit in the consumer category fell by a whopping 41 percent—ouch! You'll see why this category is suffering when you hear what businesses are in this group. This category consists of RV company Forest River, apparel and footwear companies Fruit of the Loom and Brooks Shoes, battery brand Duracell, custom picture framing business Larson Juhl, and toy company Jazwares, maker of the popular Squishmallow toys.

Just as a quick aside, look at how cute these Warren and Charlie Squishmallows are—they sold out pretty much instantly at this year's Berkshire annual meeting. So if you have a connection to get me one, please let me know; I'll pay handsomely. One of the most interesting nuggets of this entire SEC filing is a small little paragraph hidden all the way on page 43 of this 56-page document. Here's Warren Buffett describing what's happening at Forest River: "The RV business: Forest River's revenues declined 38.6 percent in the first quarter of 2023 compared to 2022, reflecting an overall 44 percent decline in unit sales. Forest River experienced strong unit sales in recent years and through the first half of 2022. Since then, volumes have declined attributable in part to the impact of rising interest rates, inflation, and other macroeconomic conditions."

These few sentences sum up perfectly what has been happening in the economy these past few years. In 2020, 2021, and part of 2022, interest rates were incredibly low, the stock market was skyrocketing, real estate values increased significantly, and generally speaking, the economy was booming. Buffett went as far as to say that the economy was the strongest he has seen since World War II. Consumers felt confident enough to spend money, and when you think about it, an RV is the ultimate discretionary purchase.

With a little Googling, I was able to find that used Forest River RVs with roughly 20,000 miles on them cost nearly one hundred and thirty thousand dollars—that's the price of a house in some places in the Midwest. Unless you're worth millions and millions of dollars, you would have to feel pretty comfortable with your economic future in order to make such a large discretionary purchase. RV sales of Forest River were also boosted by low interest rates, as many buyers take out loans in order to make the purchase.

Check out these numbers: If someone took out a 150,000 seven-year loan at a two percent interest rate to buy a new RV, their monthly payment would be around 1900. But if we raise that interest rate up to ten percent, the payment jumps to nearly 2500 a month. That is more than a 30 percent increase in the monthly payment. This is a perfect example of how the Fed raising interest rates leads to a slower economy.

When the cost to borrow money increases, it makes it more expensive for consumers to make large purchases on credit. I always like to end these types of videos with a tangible takeaway from Warren Buffett that you can begin applying to your life today. I know that there is a lot of concern about what the future of the economy is going to hold. It seems like every headline is about how the economy is going to enter a recession, the coming housing market collapse, or which large company just announced a significant layoff.

One piece of wisdom from Buffett stands out during these uncertain times: the concept of becoming the best in the world at what you do. Buffett was asked at a Berkshire annual meeting what someone could do to protect themselves against inflation and other forms of economic uncertainty. Most people would have expected him to say something like "buy these types of stocks" or "use this particular type of investment strategy." However, Buffett approached it differently.

He said the best protection against a difficult economy is to become world-class at what you do. Use the example of a doctor in Buffett's hometown of Omaha, Nebraska. This doctor is the best doctor in the city. Regardless of what happens in the economy, this doctor is always going to have work and be able to charge the price he or she wants. This is because there is always going to be demand for this doctor's services because of how highly skilled he is.

This concept applies in virtually every occupation. If you're an elite salesperson and your company has to lay off people, you don't have to fear getting let go. And even if you do, you can easily find another job because your elite skill set is always going to be in demand. This concept doesn't apply purely to white-collar professions.

Let's say you are the best home builder in your area. Over time, you have developed a reputation in the area for doing high-quality work and being extremely honest. If new home construction in your area were to fall by 30 percent due to a weaker economy, you would be just fine. You would still have more business than you can handle, and it would be the home builders that do low-quality or average work that would be struggling.

Understanding this concept of being the best at what you do completely changes your earnings potential and ability to withstand tough economic times. So there we have it. Make sure to hit the subscribe button because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.