To be fair, I’m being a bit cynical in this article. Warren Buffett, despite his father having once been a Republican congressman from Nebraska, has been a lifelong Democrat. So it's natural he’d support Obama. However, I think Buffett gets particularly enthusiastic when he has an opportunity to make money.
Mega-profitable opportunities are hard to come by for Buffett, particularly with a $50 billion cash hoard and a lumbering giant such as Berkshire Hathaway (BRK.A) under his able command. And Barack Obama presents just such an opportunity for Buffett.
Buffett is not alone in advising Obama on the economy. Eric Schmidt, CEO of Google (GOOG), has also been advising Obama, as has Citigroup (C) Chair Bob Rubin and Jon Corzine, former Goldman Sachs (GS) co-chairman and now-governor of New Jersey. With investments ranging from Johnson & Johnson (JNJ) to Wells Fargo (WFC) to U.S. Bancorp (USB), it’s worth looking at the wider reasons why Buffett might be supporting Obama’s stances on various issues.
Lets look at Obama’s pronounced policies and why Buffett would like them:
Capital Gains: Obama wants to raise long-term capital gains taxes. Under Bill Clinton, they were 20%. Under George W. Bush, they were reduced to 15%. The idea behind raising the taxes is that this primarily effects the wealthy and does not affect middle-income or lower-income people.
This is a not a Democrat vs. Republican issue. In fact, the largest increase in capital gains occurred when Richard Nixon became president in 1969 and raised the tax from 28% to 49%. What happened then? It effectively eliminated the revenue that the government collected from the capital gains taxes, because there was a negative incentive to sell shares.
When there is negative incentive to sell, not only is less revenue raised by the government but there is less money reallocated from older business to new, entrepreneurial ventures. The market and the economy began to slide in the early '70s, creating the worst bear market since World War II, until Buffett, in 1974, found himself in a situation in which he felt like an "oversexed man in a harem" because stocks were so cheap.
Buffett would like to find himself in that situation again.
Well, will Buffett be penalized by any raise in capital gains taxes? No. Buffett has already determined that the bulk of his estate would be left to charity (notably the Bill & Melinda Gates Foundation, Microsoft (MSFT) founder Bill Gates being one of Buffett’s closest friends), making it tax-free.
Also, a raise in capital gains taxes will penalize any long-term shareholders of Berkshire Hathaway should they want to invest elsewhere or start new companies, in the case of significant changes at Berkshire. This helps Buffett’s estate by freezing the mobility of cash. An increase in capital gains is, in effect, a tax on asset mobility. This freezing benefits Berkshire Hathaway and hurts newer companies in need of capital, driving down asset prices of growth companies.
Congress finally slashed the Nixon capital gains raises in 1978 (under Carter), giving rise to the venture capital boom that spurred on Silicon Valley all through the '80s and '90s. Anybody who thinks an increase in capital gains taxes will result in more government revenue only need look at the '70s as a prime example of the reverse.
Obama has stated that he will most likely go beyond the 20% long-term capital gains tax that existed during the Clinton administration and aim for somewhere between 20% and 25%.
Higher Estate Taxes: Both Buffett and Obama are against repealing the estate tax. Obama has stated: "Let's call this trillion-dollar giveaway what it is: the Paris Hilton Tax Break. It's about giving billions of dollars to billionaire heirs and heiresses as a time when American taxpayers just can't afford it."
Obama has proposed to "reverse some of those tax cuts that went to the wealthiest Americans." Buffett has stated that repealing the estate tax “would be a terrible mistake.”
The estate tax is at the crux of a philosophical debate going back to the founding of America, which rejected the idea of privilege and status being inherited from one generation to the next. Buffett has said: "The idea that you get a lifetime of privately funded food stamps based on coming out of the right womb strikes at my idea of fairness." This statement has its roots in Thomas Paine’s Common Sense, which states: "Hereditary succession ... is in its nature an absurdity, because it is impossible to make wisdom hereditary."
The big problem with the estate tax as it is right now is that it forces inheritors to value illiquid assets -- for instance, a family business. Once those illiquid assets are valued, the inheritor pays a tax.
I don’t want to argue against a founding father such as Thomas Paine. Perhaps heirs should not inherit family businesses they are ill-equipped to run. However, because of this quirk of the estate tax, founders of businesses, or their immediate heirs, are often forced to sell the businesses they spent a lifetime building. Because of the forced motivation of the sale, it's often done at depressed prices before the IRS comes calling.
Who benefits? Well, the deep-pocketed, entrenched corporations whose business it is to buy stable family-run businesses that are forced to sell. Who could that be? Berkshire Hathaway!
Energy: Obama has primarily been against offshore drilling and against nuclear power, although in the past week he has shifted slightly to suggest that both offshore drilling and the building of nuclear power plants might be considered. There is much debate about the pros and cons of both offshore drilling and nuclear power.
The cons:
-They're environmental hazards.
-The benefits are long-term and do not solve our short-term dependence on foreign oil.
The pros:
-For oil drilling, it’s worth noting that there hasn’t been a significant spill since 1969.
-In the middle of the Gulf of Mexico, which Hurrican Katrina went right through, there was not a single spill.
-There hasn’t been a nuclear plant accident since “Three Mile Island” in 1979.
-Technology for both nuclear power and offshore drilling has gotten significantly safer in past decades.
-The psychological effect of knowing we are moving toward a solution will have an immediate effect on the price of oil.
Obama has also called for a moratorium on new coal production facilities, again as a way to preserve the environment. Coal is the U.S.’s most plentiful source of energy.
Why would Buffett like any of this?
MidAmerican (MDPWM) is a utility company that delivers power throughout the country. If the nation’s grid were to suddenly shift toward a favorable nuclear energy policy, it would significantly change the economics of the energy industry. For instance, MidAmerican recently concluded that after completing due diligence on the possibility of building a nuclear power plant in Idaho, it had decided not to because of the significant cost. MidAmercian’s primary business is delivering natural gas to customers around the country.
This is a good, predictable business -- as long as Buffett doesn’t have to switch to delivering nuclear power or delivering the oil achieved from drilling offshore.
Buffett, however, has criticized Obama’s stance on windfall oil taxes. What concerns Buffett is: Why oil? In other words, what if another commodity triples in price and the companies that produce that commodity make a windfall? Should they be taxed also? Why single out oil?
Buffett thinks it isn’t fair. And why should he? Bekrshire certainly has had its share of windfall profits, and he would hate to think that one of these days, his companies get singled out for a windfall profit tax.
To be fair, Buffett has stated that he also likes McCain. Specifically, in an interview on May 5 with Becky Quick on CNBC, Buffett stated about McCain: “I admire him a lot. I think he's an absolutely first-class human being, and if the Republicans are going to elect somebody, I hope it's John McCain.”
But when asked by Quick what it would take to support McCain, Buffett said it was “unlikely” he would back McCain "unless he has a serious change, a lobotomy or something like that."
A note from James Altucher:
Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.
Here are some examples:
Stocks related to drilling the Marcellus Shale
Microcaps trading for less than tangible book
Stocks that do well after Hurricanes
Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.
At the time of publication, James Altucher had no positions in stockes mentioned.
Posted on Aug. 5, 2008
