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Why Buffett Disagrees With Icahn's Dire Prognostication For The Market


Carl Icahn appeared on CNBC on Thursday to explain why he's "extremely cautious" on the U.S. market. Talking about the Federal Reserve’s decision to maintain interest rates unchanged, he said, “I do believe in general that there will be a day of reckoning unless we get fiscal stimulus.”

On Friday, Warren Buffett also appeared on CNBC and assured investors shouldn't take Icahn’s warnings as gospel.

“There are probably, this is the most wildest of guesses, 50,000 people or more today that bought stocks … and 50,000 people who sold,” Buffett said. "So I don't know that I would pick out any one of them and put too much weight in what they did."

Related Link: Icahn Incites Panic In The Market, Buffett Urges Caution

Is The Fed Feeding A Bubble?

Buffett was asked about Icahn’s comments on the Fed maintaining low rates, and the risk of this creating "tremendous bubbles."

"Interest rates act on asset values like gravity acts on physical matter. If you had zero interest rates and you knew you were going to have them forever, stocks should sell at, you know, 100 times earnings or 200 times earnings,” the Oracle of Omaha explained.

When rates stood at 15 percent, in the times of Paul Volcker (1979-1987), they exercised “an enormous gravitational pull on the value of all assets, not just stocks. If you can get 15 percent, it makes the choices way different than if you get zero."

It's true rates have been kept low for longer than most people expected, Buffett acknowledged. This has led many investors into the stock market, looking for the yield they couldn't find anywhere else.

Discussing interest rates, Buffett went into negative interest rates in Europe and Japan. Even though this is “uncharted territory,” the investor doesn't see it as “the end of the world.”

“I don't think anybody knows exactly what the full implications are,” he concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.


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