Buffett Warns Economy Has "Fallen Off A Cliff"

Billionaire investor Warren Buffett warned Monday that the economy has "fallen off a cliff," accompanied with a drastic change in consumer habits. The CEO of Berkshire-Hathaway (BRK), Buffett offered long-term optimism to temper his short-term pessimism.

Appearing on CNBC, Buffett was blunt about his short-term outlook, adding that consumers are really changing their habits.

"It's fallen off a cliff," Buffett said of the economy. "Not only has the economy slowed down a lot, but people have really changed their habits like I haven't seen."

However, despite gloomy skies on the immediate horizon, Buffett said he has confidence in the U.S. economy.

"Everything will be alright. We do have the greatest economic machine that's ever been created," Buffett said.

The famous investor also explained his bets on the market. For example, he has invested in Tiffany & Co. (TIF), despite the fact that he recognized that it will be a bad year for all luxury dealers and he will likely deal with some losses in the short term. Looking ahead, however, Buffett predicted that Tiffany's will survive, and when the stock rebounds he will catch a big upside.

He has noticeably toned down his presence in the political arena, specifically with the Obama administration. During the campaign and transition period, Buffett served as an advisor to Obama and then on his Transition Economic Advisory Board.

Buffett, 78, expressed on his frustration that some members of Congress have been unable or unwilling to put aside partisan differences and really attack the problem at hand. Although he said overall the economy will recover no matter how Congress acts, the speed of the recovery will be greatly impacted by their decision to cooperate or not.

"It's important in terms of the speed with which we work," Buffett said. "I've been very pleased actually with the immediate response…kind of disappointed as we've gone along in terms of we can't quite get our act together."

He had brief words of advice for Barack Obama, stating that "what is required is a commander in chief that's looked at like a commander in chief in a time of war."

Last week, Berkshire Hathaway reported a steep decline of about 96% in its fourth-quarter profit, while earnings for 2008 declined 62% from last year. Further, the Oracle of Omaha said the economy would be in shambles throughout 2009 and probably well beyond, but expressed hope that America's best days lie ahead.

In his letter to shareholders, the investment guru noted, "Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so."

Buffett's comments and outlook on companies are closely watched by investors and analysts alike, who consider him an astute business man and a far-sighted investor. He was named the richest American by Forbes last year. He took over Berkshire when it was an ailing textile maker. Now, Berkshire owns companies operating in sectors as varied as insurance, utility, furniture, restaurants, carpet and jewelry. It also has interests in companies like Coca-Cola Co., Wells Fargo & Co. and Kraft Foods Inc.

The Omaha, Nebraska-based company's net income for the fourth quarter plummeted to $117 million or $76 per share from $2.947 billion or $1,904 per share in the year-ago period. Revenues dropped to $24.592 billion from $28.043 billion in the same period in 2007.

In a candid admission in the letter, Buffett said, "During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt...