Bad Medicine, part I

Friday, August 15, 2003 | 10:28 PM

On Thursday, I suggested that Warren would step up to the plate and make the tough call:

Buffet’s unbelievably success has been about making the difficult calls. Buffet is all about postponing fun, and taking your medicine now. He has a very, very long time horizon. We can expect to hear about Buffett’s own economic agenda of value, moderation, anti-tax giveaways over the next 12 months. That likely means spending cuts, tax hikes and service cut backs for California. And because he's Buffett, he may very well get a free pass on them. If Warren says we need a tax increase, well then, Hell, we must need a tax increase. California may not realize it yet, but they are staring down the barrell of some bad tasting fiscal medicine. Don’t expect Warren to sugar coat the nasty stuff (They’ll be healthier for it in the long run)--The Legitimator!

I assumed it would take Buffett a few days to get up to speed. (Wrong!) Today, Warren dropped the bombshell, as the WSJ noted: Schwarzenegger Adviser Buffett Hints Property Tax Is Too Low:

"Warren Buffett, the billionaire financial adviser to Arnold Schwarzenegger's campaign for California governor, strongly suggested in an interview that the state's property taxes need to be higher."

Warren is not screwing around. Day 1, he immediately attacks California's most cherished example of populist democracy. He (and I) think prop 13 is an example of what happens when you allow children to set their own bed times. Populism? Bah, hum bug. What this state needs is a good Philosopher King, and kiddies, you just got one.

OK, lets roll up the short sleeves, and get down on it: Warren ponies an example of how absolutely goofy he thinks Prop 13 is:

Mr. Buffett, the chairman of Berkshire Hathaway Inc., took on California's famous Proposition 13, which has limited property taxes there since 1978. As an example, he pointed out the difference between his own property-tax bills for homes he owns in California and Nebraska." [editor’s note: Who the #$%&* wants to live in Nebraska?] His home in Omaha, he said, is valued at roughly $500,000. His current yearly property tax bill on that home: $14,401. In California, he owns a Laguna Beach home valued at $4 million, or eight times as much. The annual property taxes on that home are just $2,264 -- a fraction of what he pays in Omaha. More to the point, said Mr. Buffett, the taxes on his Omaha home rose $1,920 this year, compared with $23 on the Laguna Beach home. Mr. Buffett attributed the scant jump in California to the restrictions of Proposition 13, which generally limits property-tax increases to 2% a year, no matter how much the value of a property appreciates.

Californians want answers?
We want the truth!
You can't handle the truth!

But Warren knows no other way to speak -- except straight. He is no slick willie. Warren does NOT feel your pain. Warren is like a kindly old physician, when he pulls out the big needle:
"Is it gonna hurt?"
"Yes, probably a lot. Brace yourself."

Californians, get ready to suck it up:

"This property-tax illustration, that tells you, you can draw certain conclusions from that," said Mr. Buffett. Noting that tax assessments also vary widely, he said of the tax system, "In effect, it makes no sense." "But you've got to look at everything," he added. "I took the job yesterday. And it's going to be his [Schwarzenegger's] policies. Any advice I give is going to be to him."

Ouch.

Through Berkshire Hathaway (disclosure: I own it, as do clients), Buffett has billions of dollars invested in California indirectly:

-Wells Fargo
-See's Candies
-MidAmerican Energy Holdings Co.
-Kern River Gas Transmission Co.

But Warren and Berkshire own no California bonds. That's right, none. Think about that for a minute. One of the greatest investors in the history of investing has decided that California's bonds are not worth owning. Why? In case you hadn’t noticed, Standard & Poor's downgraded California bonds to a triple-B rating -- the worst damn rating of any state in the nation (two notches above junk).

As noted above, Warren doesn’t do Junk, and Warren doesn’t like coming in last.

How does this all play out, looking forward to the 2004 elections? As suggested yesterday, it has major implications:

Mr. Schwarzenegger, like other candidates, has vowed to improve the state's fiscal picture. But suggestions that tax increases could be an answer could represent a problem for Republicans and the Bush White House, who have pursued tax cuts as the best way to improve the economy overall. Democrats are sure to leap at the contradiction, and the Buffett comments may likely to deepen the biggest fear of many national Republicans: that the moderate views of Mr. Schwarzenegger, for all his appeal as a candidate, could spark infighting within the party . (Emphsis mine)

Ignore Warren, will they? I'll kick their pathetic D.C. asses straight across the Potomac, the next time the bastards ignore my good advice.

Easy, Warren. they're just politicos; They don't know any better.

Quite fascinating, the reach of Warren. Does the Oracle of Omaha have any final thoughts?

"The truth is California has got very serious financial problems. It's an economy that's the size of France and there's no way the U.S. is going to have a healthy economy if California continues to have the problems it has . . . I've got a selfish interest in this country doing well, no doubt about that." -Warren Buffett

Well said Warren, well said.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Since I mentioned the Socratic concept of the Philosopher King above, let me turn you onto an absolutely killer Canadian band called -- brace yourself -- The Philosopher Kings.

I found them by accident - intrigued by their name -- and borrowed a disc from a friend 5 years ago. Their self titled first CD is their best -- its a hep, soulful pop album with rich melodies set over a smokey jazz backbeat. The Philosopher Kings are one of the great undiscovered modern pop bands. And, you can pick up the CD used at Amazon for like a $2.

Go. Now.

Friday, August 15, 2003 | 10:28 PM | Permalink | Comments (0) | TrackBack (0)
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