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9:00 AM EST, Monday, January 19, 2009: Martin Luther King Day. It's a federal holiday. But my friends are working. They are fearful. Seriously fearful. So, let's start with the optimism of Warren Buffet:

Buffett says U.S. in 'economic Pearl Harbor'

OMAHA (AP) — Billionaire investor Warren Buffett says the U.S. is engaged in an "economic Pearl Harbor."
In an interview that aired Sunday on Dateline NBC, the chairman and CEO of Berkshire Hathaway (BRKA, BRKB), said the nation's economic situation is not as bad at World War II or the Great Depression, but it's still pretty severe.

Buffett said Americans are in a cycle of fear, "which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear. We'll break out of it. It takes time."

Buffett's interview centered on President-elect Barack Obama and the tough task he faces in fixing the U.S. economy.

"You couldn't have anybody better in charge," the Omaha resident said of Obama, who'll be sworn into office on Tuesday.

As one of Obama's economic advisers, Buffett said the president-elect listens to what his advisers say, but ultimately comes up with better ideas.

He predicted that Obama will be able to convey the severity of the economic situation to the American people and explain their part in alleviating it.

As to how long the crisis would continue, Buffett said he didn't know.

"It's never paid to bet against America," he said. "We come through things, but its not always a smooth ride."

Omaha-based Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo and Coca-Cola.

Its shares have, like everyone else, not done well recently.

Things are bad out there. How bad? From this weekend's Economist. Read the chart carefully:

Accelerating downhill
Why China and Germany need to do more to boost demand

EVERYONE knows that the financial system took a downward dive in mid-September. The failure of Lehman Brothers turned the rich world’s credit crunch into a global calamity, as the international banking system came close to collapse and even the most basic functions of finance, such as trade credit, seized up. To stop this financial breakdown sending the world economy into a tailspin, politicians scrambled with bank-rescue packages and promises of fiscal stimulus. Unfortunately, it seems increasingly clear that they failed. Just as the financial crisis went global at the end of 2008, so large chunks of the world economy went into freefall.

Industry is in grave trouble. Around the world factory output is plunging at its fastest pace in decades as the consequences of slumping demand have rattled along the supply chain. In the three months to November American industrial production fell at an annualised rate of 16% compared with the three months before. Over the same period Japan’s fell by 21% and Germany’s by 15%. Some emerging economies have done even worse. South Korea’s factory output fell at an annualised rate of 25% in the three months to November, about as fast as in its financial crisis a decade ago.

On the basis of these figures and the gloomy state of manufacturers’ order books, economists at JPMorgan reckon that global manufacturing production is likely to have fallen at an annualised rate of almost 20% in the last three months of 2008. The car industry is seeing the most savage drop in sales in its history (see article), but the collapse in demand is widespread. From computer chips to sophisticated machine tools, the production of goods is plunging. As a result trade flows, which had grown faster than output for decades, have recently shifted into reverse. Germany’s exports are falling at their fastest pace in many years. Taiwan’s exports fell by 42% in the year to December. After years of double-digit growth, China’s exports are now falling too, though by less than those in the rest of East Asia (see article).

Manufacturing is highly cyclical, falling first and fast in a downturn. Firms are quick to scale back capital spending and consumers skip new cars rather than scrimp on food or healthcare. A rapid rundown in inventories and temporary distortions in credit markets (see article) have not helped. The collapse of trade finance made it all but impossible for many producers to shift their goods abroad. The plunge in trade flows is partly a result of tumbling commodity prices.

Trade finance is beginning to flow. Firms cannot run down stocks for ever: eventually, they will empty their warehouses. But the damage is done: those temporary factors triggered a collapse in global demand that has now spread way beyond the Anglo-Saxon economies at the heart of the credit crisis.

Output in the euro area probably fell as fast as in Britain and America in the last three months of 2008, even as Japan’s GDP sagged still more dramatically (see article). The drop in industrial output has hammered export-dependent economies, from Germany to Taiwan, and there is little sign that domestic demand in these countries is stepping in to compensate. In some countries with big external surpluses, notably China, the opposite may be true. China’s imports have been falling faster than its exports and in recent months its trade surplus has risen.

Add these factors together and the outlook seems grim. This sharp global drop in industrial production will itself lead to more weakness, as unemployment rises around the world and demand therefore falls. And in America, too, the outlook has grown darker. Around three-quarters of output growth over the past two years came from net exports. That prop will go. And while domestic demand in surplus economies flags, the imbalances that have contributed to the current crisis will not right themselves, and will encourage protectionism. When rich-country economies were growing, China’s surplus was a political lightning-rod; how much more dangerous will it be when unemployment is rising?

To mitigate these risks policymakers need to do more to prop up demand, especially in countries that have external surpluses. Fiscal stimulus packages that seemed sufficient two months ago may be too small, and too slow to take effect. Much of the infrastructure spending in the package that China announced in November will not kick in until later this year. This week’s decision by Germany’s government to add a second €50 billion ($66 billion) stimulus package is a step forward, though at barely more than 1% of GDP it is still far too small (see article). For the time being, the biggest and quickest fiscal boost is likely to come from America, as the Obama team seeks speedy passage of an $800 billion package of tax cuts and spending. That sort of money may put a brake on the global industrial collapse, but it will not set the world economy on course for a sustainable recovery. Others still need to do far more.

Bargains at Circuit City? It was in Chapter 11, but couldn't find a recovery solution. It's now in Chapter 7 where its inventory is being liquidated as fast as possible. You may be able to find some bargains in your local Circuit City. But you may not. A reader , Tim Jebara writes this morning:

Harry be careful of Circuit City deals, on a few things they cut prices 5-10% but they marked them up to msrp. So you might think your saving a lot on that TV, but it may be cheaper at Best Buy. I believe in February and early March the best deals will be had.

Australian Open Tennis began this weekend. The huge time difference makes this ideal for TiVo. Enjoy.

For the full schedule go to Tennis.com.

Serious innovation:
A farmer lived on a quiet, rural highway. But, as time went by, the traffic slowly built up at an alarming rate. It became so heavy and so fast that his chickens were being run over at a rate of three to six a day.

So he called the sheriff's office and said, "You've got to do something about all of these people driving so fast and killing all of my chickens."

"What do you want me to do?" asked the sheriff.

"I don't care, just do something about these drivers."

So the next day the sheriff had the county go out and put up a sign that said: SLOW: SCHOOL CROSSING.

Three days later, the farmer again called the sheriff and said, "That sign didn't help a bit. They are still hitting my chickens."

So the next day, the county put up a sign that said: SLOW: CHILDREN AT PLAY.

Again, no change. So the farmer called and called, every day for three weeks.

Finally, he told the sheriff, "Look, your signs are just not working. Mind if I put up one of my own?"

The sheriff told him, "Sure thing, let's see if yours works better." He was willing to agree to anything to get him to stop those daily calls.

Well, the sheriff got no more calls from the farmer. After three weeks, he decided to call the farmer and see how things were going. "Did you put up your sign?"

"Oh, I sure did. And not one chicken has been killed since. I've got to go. I'm very busy." And he hung up the phone.

The sheriff thought to himself, "I'd better go have a look at that sign. There might be something there that WE could use to slow down drivers..."

So the sheriff drove out to the farmer's house, and he saw the sign. It was on a whole sheet of plywood. Written in large, yellow letters were the words: SLOW: NUDIST COLONY.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.