BECKY QUICK: Good morning, everybody. Welcome to Squawk Box here on CNBC. I'm Becky Quick, reporting live from Omaha this morning. Joe Kernen and Andrew Ross Sorkin are back at headquarters on the East Coast. We have the man of the morning with us, Warren Buffett. Obviously we have a lot to talk about with him, including stock records runs, the Fed, bonds, the dollar and his deal for Heinz. But first, before we get to all of that, Joe and Andrew will have a short round up of the morning's top headlines. And guys, I'll send it over to you.



JOE KERNEN: Okay. Hello. Good morning. Hello, hello—

BECKY: Hello. Good morning.

JOE: How are you? Hi— Warren.

BUFFETT: Well, yeah I— you—

JOE: I keep hearing you talk about me, Warren. No one knows what the heck you said, so— I— I don't know. It's like who— (LAUGH) it's like one of the answers you get—

BECKY: No, I—

(OVERTALK)

JOE: —to a lot of questions.

BECKY: —I was sitting— I was sitting right next to him and I heard him mention your name, too, and I'm not entirely sure what he said.

JOE: Nobody knows.

(OVERTALK)

ANDREW ROSS SORKIN: Joe and I— Joe and I were having this conversation this morning. He said, "What did he say?" And I said, "I'm not sure." And I actually said the—

(OVERTALK)

BECKY: He said something nice about him.

JOE: Was it, "Oh, it's—

ANDREW: It was nice.

BECKY: It was— it was something—

ANDREW: It as nice. I think.

BECKY: It was something about a question you (UNINTEL). It was nice, it was a question about something you're always bringing up and it wasn't NetJets.

BUFFETT: See my lawyer. (LAUGH)

(OVERTALK)

JOE: That was a long time ago. All right. (LAUGHTER)

ANDREW: Anyway, we're going get back— we're going get back to— to Omaha. And let me just say, Warren, at— 'cause I— and I— I just got back now. You— Warren and— Warren and Charlie (Munger) were on fire this weekend, actually (RUSTLING) in a way that I don't think— we've been— we've been asking these questions for now I think five years, and I thought this was one of the most substantive meetings and just the most spirited of the discussions. Obviously Doug Kass— threw— threw a couple ones at them, too. But it— I thought it was fascinating.



JOE: Y— War— Warren, you— I— I've heard that people get to a certain age where they say whatever the hell they want to say. And I mean, has it got anything to do with that or—

BUFFETT: Well, we— we give 'em a little food or things like that, (CHUCKLE) it's amazing how far it goes.

BECKY: Yeah, it's true. I— I— I think though that— you and Charlie have been saying— kind of speaking your mind, Charlie in particularly— he may be almost 90, but I— I think he was talking that way 30 years ago and even 60 years ago.

BUFFETT: He was talking that way when I met him in 1959. One of the things that attracted me to him.

BECKY: Yeah, so he had a lot of things that he had to talk about. But Warren, before we jump into what happened this weekend, why don't we start off with the headline that the guys were just talking about, JP Morgan. You said before that you own shares in JP Morgan in your private account, not for Berkshire.

BUFFETT: Right.

BECKY: So, you get to vote on this, too. ISS came out with this recommendation, in terms of what they're saying about the directors, three directors they're saying you shouldn't vote for. They actually have some pretty harsh language in some of the things that they were talking about. They said, "The board appears to have been largely reactive, making changes only when it was clear it could no longer maintain the status quo." What do you, as a shareholder in JP Morgan think?

BUFFETT: Well, I don't know the details, but if you're the director of a— a company like JP Morgan— you cannot know the details of what's going on with trading or anything of the sort. You really— your key decision is whether you believe that you have the right CEO If you have the right CEO the board has done its job, and— and if you prevent the CEO from overreaching in terms of (UNINTEL) or something. And— and I've written about that. And— and I think they've got the right CEO I— I— so I think they're— they're done their job.

BECKY: Y— you told us last week that— that you think he should maintain both his chairman and the CEO Titles as well.

BUFFETT: I think— I think it's fine if he does. Sure.

BECKY: Okay. So, you're on board— not just as— an outside observer, but also as a shareholder in JP Morgan?

BUFFETT: Right.

BECKY: Let's talk a little bit about this weekend. It was a big weekend— if you had to pick your headline from what happened over the weekend, what would it be?

BUFFETT: I think it's just that everybody had a good time, including me and— the board members, the managers— and certainly the shareholders. I— I— I probably waved many thousands (UNINTEL) as I went around and— and— you know, they all call me Warren, which I like. And— and— certainly in terms of the sales at our various enterprises, they all broke records. So— people seemed happy.

BECKY: Some of the questions that jumped out at me— that jumped out to me as being some of the ones that were maybe some of the most persistently asked questions, had to do with your investigating style, because the Heinz deal is a different deal than we've seen in the past. It's one that links you up with private equity, which you haven't done before. It's one that takes on some leverage, and there have been some questions that people have asked. Just, does this signal that you're looking at things differently? Does it signal that— you'll be getting into deals you might not have in the past? And does it mean that you're not all that confident in where the market's headed overall?

BUFFETT: No. Well, we took— we took on leverage when we bought— BNSF, the railroad. And— and— and we, in no way consider— our— our partners in this as— as private equity. These are people that buy for keeps. They— they run businesses, I mean, they actively— and— and they will keep running them.

So, this is not a private equity firm. These fellows are not planning to make their money on some override on other people's money. They have big sums of their own money in this— deal. And— Jorge Paulo Lemann and my— my main partner in this— he'll— he'll keep the stock indefinitely, as will we. So, it's a partnership.

And our preferred stock introduced some leverage for our partners, but it's nonthreatening leverage. You know, it— it— it's held by their partners. So, we have— between the— between the two of us we have 16 billion— of equity in this deal and they have the more leveraged play, because we have this preferred stock.

BECKY: There was a question asked over the weekend about a column that had been written about this deal that suggested that, you know, the— the money that you had that wasn't in preferred shares, and the common was dead money.

BUFFETT: (CHUCKLE) If that 4 billion is dead money I'll be very surprised. And— and that's what our partners own. I mean, we each own 50 percent of the equity. And if it works out as we hope— the rate of return on that 4 billion, our 4 billion, their 4 billion of common, will be higher by a considerable margin than the rate of return on the preferred stock we got. But that— that's the way it should be.

BECKY: So—

BUFFETT: That's not dead money, by a long shot.

BECKY: Are— are people wrong when they assume that you're looking at deals like this because you look at the stock market and you think that it— it's not as cheap and you can't get as much value as you might have been able to get there in the past?

BUFFETT: Well, we always prefer to buy businesses, and that's what we consider Heinz to be. Well, we'll— we'll be in Heinz forever and— if a few of our partners decide to sell out at some point, I hope they sell to us. So, this— this— you know, we— we'd like to buy— we'd like to have bought 100 percent of Heinz, but we— we love the idea of Jorge Paulo Lemann being our partner. So— if it takes 50 percent of the equity to bring him in— that's fine with us.

BECKY: We— talked to you about the jobs report on Thursday of last week. And you said you wouldn't have put money on it, but if you had to bet you thought it would be a weaker number. It came in at up 165, which the market took as a huge roaring success. One sixty-five still isn't great growth, and it's certainly down from where we've been before we got into this new year. What do you think about that number? And again, your— your read on where you see the jobs market.

BUFFETT: Well, it's a good thing I didn't bet on it, isn't it? (LAUGH) I— I— I don't pay that much attention to the numbers from month to month. But in terms of our businesses, and we have 70 plus direct businesses and a lot more indirect— we're seeing the same thing we've been seeing for four years and that's gradual improvement in— in— in the economy. And we're— we cut across the whole economy, so I think it's a pretty good— a pretty good— view of what's going on.

And what you are seeing now is certain areas, which didn't participate initially, like home building, coming back fairly strong. Our— our— we had record sales at Furniture Mart last year during this week— shareholder week, 36 million. It looks like— we know we'll have another record, it'll be about $40 million in one week. And the retailers out there know what that is. The— the biggest— our biggest gains, 30 percent same in flooring. And— and so people are buying carpeting and— and— that area is— is— is coming back. But overall the economy is— is moving forward but— at a slow pace.



BECKY: Why? What— there's been a lot of questions about why businesses aren't investing more, why they aren't hiring. What— what do you think the problem is?

BUFFETT: Well, they always hire— they— they invest— they hire in respect to demand. Now we had a record investment last year, and well over another record this year. I mean, we— we have lots of projects going on that we think make sense. But— businesses respond to demand and demand as come back, but slowly. Now I can see demand coming back faster in the residential area now than— than a year ago or 15 months ago and— and that makes a difference. And it kind of filters down through our brick business, carpet business and insulation business. But, it's not roaring back.

BECKY: Right. I know that— you're not somebody who looks at the market averages on— on a daily basis—

BUFFETT: No.

BECKY: —or cares about any of these things. But when you start seeing the trend that we've b— been seeing, which is— almost a straight march up, it seems like we're hitting new highs almost every day— and that's the type of thing that catches Main Street's attention.

We've got a lot of individual investors who are sitting around wondering if they've missed everything, if they should get back in, if they— if it's too late, if they've missed the train. I mean, w— what— what would you tell those people who are sitting at home wondering what the Oracle of Omaha thinks about when it comes to the market today?

BUFFETT: Well, they should pay— they should pay more attention when they're crossing those milestones on the downside, that's when stocks are getting cheaper. Right? That's when stocks are going on sale. But people do get more excited when they see new— well, I can remember when it was a big time when the Dow c— crossed 100. (LAUGHTER) And— and I certainly remember well when it was a thousand, I mean, that was a magic number.

So— probably in— in my lifetime and certainly in your lifetime, you know, you will see markets that are far higher than this. I mean, the— the retention of earnings by American industry and the growth of the country, — will cost stocks to go higher over time. You're not getting everything out of the stocks in terms of the divi— the dividends they pay, compared to the earnings, so that retention builds it up.

It's exactly like if you had a savings account and you only took out part of your interest. Your savings account would grow. So, I don't get too concerned about it, given level. You'll see— you'll see— you will see numbers a lot higher than this in your lifetime, Becky.



BECKY: You know, I— I know you watch the show and— and you probably have seen what Joe's been talking about. For— for quite a while now he's been talking about how this is something that reminds him of what he's seen in the past. And Joe, maybe you want to talk a little bit more about this, just what you've seen with the market, your theory about how things continue to climb and this feels really different than what we've seen in the past.

JOE: And I don't want—

BECKY: What do you think, Joe?

JOE: There— there's two things that— that scare people, that's when you're— and— and people do the same thing with human nature, they— they ride things all the way down and they think it's too late to sell. And then when things are going up, they— they— a lot of times they're not on board. And if they start out not on board, they never do get on board. And— and watching this happen— this time, every time we hit a new— a new high, people say, "Well, I can't buy now."

And— and that usually indicates that we're not near the end of— of something. And that— that's only been my— and my other point, Warren, I just get so irritated with— with sell side people that— they're— they're always saying, "I'm constructive long term, but in the— you know, there could be a pull back any time. I'm looking for, you know, five to ten percent any time."

And they— they say that as they miss thousands and thousands of points. And they're not committing new money. But they— they never— you— you can never pin 'em down on being wrong. And that's what— that's w— what I think they're most motivated. So, it's just sort of— just having seen it for so many years, it just gets— just a pet peeve of mine. And— and— you know, when it's just— when it's just utilities moving and just bond equivalents moving, it seems like— you're— you're not really at the end of— of a— of a run, of a bull run. I don't know.

BUFFETT: Yeah. Yeah.

JOE: But—

BUFFETT: When— when people talk about— you can see a pull back, of course you do. It— they pull back any day for the next thousand, ten thousand days. Nobody knows what the market's going to do the next day. But you shouldn't pay any attention to that. I— I bought a farm in 1985, I haven't— haven't had a quote on it since.

I bought a piece of real estate in New York in 1992, I have not had a quote on it since. I look to the performance of the assets. Maybe those— m— maybe my farm and my— my— my piece of real estate have had pull backs, but I don't even know about 'em. People pay way too— way too much attention to the short term. If you're getting your money's worth in a stock, buy it and forget it.

JOE: I—

BECKY: I mean, is that— is that an— oh, go ahead, Joe.

JOE: Oh, no, I— I was just— I— I've just got this sort of exciting feeling— with me 'cause I'm saying, I— I'm not sure whether Warren is— whether this is going happen or not, but, you know, he's given me a brick, and he's given me— you know, some ketchup (LAUGHTER) and— and—

ANDREW: And a Marquis jet card but that— that came up—

JOE: That didn't work. But there is a jet right behind him. Is this a surprise today for me, Warren? Is that— that one behind you? Are you going— is— is that going be mine?

ANDREW: You're going wait all three hours of the show.

JOE: Yeah— is— are you going— that's going be the—

BUFFETT: Hey, you got to stick around, Joe. Be sure to stick around, Joe.

ANDREW: There's a big unveil going around at the end of this program.

BUFFETT: There— there's—

JOE: I mean, it— is—

(OVERTALK)

JOE: Uncle Warren, it's beautiful. It's beau— it's beautiful.

BUFFETT: There's— there's— there's a name on that plane, Joe, and we'll look at it later.

BECKY: I can see it from here (LAUGHTER). I'm not going give it away, though.

JOE: Can you see the ribbon on the side?

BECKY: But yeah, that is the Global 6000. We're going be talking more about this, too. So, it's a new— it's a brand new delivery. We're going talk more about this a little bit later, too, because—

BUFFETT: But we can put you behind the wheel, Joe. Don't worry. (LAUGHTER)

BECKY: I'm not riding if Joe's behind the wheel. Can I just say that? Warren, let's— let— and let's talk (CLEARS THROAT) about the Fed. The reason so many people think that equities have done so well, at least in part, is it's not just the economy improving, it's also what the Fed is doing to make every other asset class look not nearly as— as strong as equities.

BUFFETT: Sure.

BECKY: You— how much do you think the Fed has done— how much— how much of this boom, I should say, in stocks do you think is coming from what the Fed's done?

BUFFETT: Well, it— it— when interest rates are low, and people expect them to stay low for a while— it pushes up the value of all other assets. I mean, and— interest rates act like gravity to other asset prices. Everything is based off them. So, when there are high interest rates there is a lot of gravitational pull down on the value of assets, as we found back in 1981 and 2 when— when— when the rates got to extraordinary levels.

If you guaranteed people that the long term rate would be 1.7 percent, or ten-year rate, or— you know, and short term rates would be practically nothing— you know, stocks should be, you know, selling at least double where they are now. The question in people's mind is how long it lasts. You don't— you have the strong feeling it doesn't last forever, but interest rates have a powerful effect on all asset— all assets. Real estate, farms, oil, everything else— it— they're— they're the cost of carrying other assets. They're the alternative. They're the yardstick.

BECKY: But if— if you had to look at it, would you say that 50 percent of the market's rise— it's come 50 percent from the improving economy and 50 percent from the Fed? Or does one side have a heavier weighting?

BUFFETT: I don't know the answer to that. Both— both are— are very important. If the economy had gone no place— and interest rates had come down like they have— stocks would be cheaper than they are now. And if the interest rates had been somewhat higher during this period, and— and business had come back, stocks would be somewhat higher. I don't know how to break up the two.

BECKY: Is— if you were Ben Bernanke, you know, we just heard from them last week, or when we got the FOMC minutes. We heard that they've said, "Look, if this isn't enough, we're prepared to do even more than $85 billion a month."

BUFFETT: He's a gutsy guy. I mean, he— he— he said, back in September of 2008, he would do what it takes, and he's been doing what it takes ever since. He is the man and he can do what it takes. He— he— he is— he is the man that's dealt a heavy response— a huge responsibility— to get the economy going and to keep it going. And he has used monetary policy— in a way I've never seen before.

But, we faced a situation I hadn't seen before. So, I— I'm a huge admirer of his. I don't envy the job of playing the hand out from here. But I— I think he— he— he's done very, very well in— in— in terms of what he's done for— for— for the United States.

BECKY: And you've been very outspoken about how much you admire him and— what a job you think he's done. But you've also said, over probably the last year or so, that you thought maybe if it were you in that seat, you would have taken your foot off the gas a little sooner.

BUFFETT: Probably. Well, I— I might not know how to take my foot off the gas. (LAUGHTER) If— if he— if he call— when he decides to sell or quit buying, but— with— with single selling at some point, if he calls me and asks me how to do it, you know, I will— I will tell him to call Charlie. (LAUGHTER)

BECKY: Put that in the too hard file, right?

BUFFETT: Way too hard.

BECKY: All right. If— if you'll bear with us, Warren, we're going slip in a quick commercial break right now. (MUSIC) When we come back, we will talk more with Warren Buffett. He is spending the entire morning with us, so stay tuned. We'll get his thoughts on Europe and whether it is safe for investors, when we come back. And then a little later this morning, we will also be joined, live, by Berkshire Board Member, Microsoft Chairman Bill Gates. Buffett and Gates together, live, starting at 8:15 Eastern time. Squawk will be right back.