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Julian D.W. Phillips: Bundesbank''s decision not to sell gold is historic
A Word From A Dollar Bear
By Robert Lenzner and Daniel Kruger
Forbes magazine
January 10, 2005
http://www.forbes.com/home/free_forbes/2005/0110/036.html
Warren Buffett's vote of no confidence in U.S. fiscal policies is up
to $20 billion.The dollar has fallen savagely against the euro for
the past three years, and the trade deficit is running $55 billion a
month. Is the currency rout over? Can the trade deficit be fixed
with a rise in interest rates or an upward revaluation of the
Chinese currency? Warren Buffett, the world's most visible dollar
bear, says the answer to both these questions is no. His bet against
the dollar, reported at $12 billion in his last annual report (for
Dec. 31, 2003), has gotten all the bigger. Now his Berkshire
Hathaway has a $20 billion bet in favor of the euro, the pound and
six other foreign currencies.
Buffett has for a long time been lecturing fellow Americans about
their bad habit of borrowing from abroad to live well today. He made
a big stink about his currency trades in his March 2004 letter to
shareholders. Forbes phoned him recently for an update, hoping for
the news that the Scold of Omaha had softened his views on the
decline of the dollar. What we got was more doom and gloom, more
than we have ever heard from the man. In other words, he is not
about to cover his short position on the dollar.
Buffett said that he began buying foreign currency forward contracts
when the euro was worth 86 U.S. cents, and kept buying until the
price reached $1.20. It's now worth $1.33. Buffett said he is not
adding new positions now but has been rolling over contracts as they
mature. Berkshire lost $205 million on currency speculations in the
first half of 2004, but more than made that back with a $412 million
gain in the third quarter. It's likely that the December quarter
report will show another huge gain.
Since January 2002 the dollar has fallen 33 percent against the
euro. Buffett blames that on bad policy, coming from both the White
House and Congress. It does appear that forex speculators are no big
fans of George Bush or his Treasury secretary, John Snow. Since Nov.
2 the dollar has fallen 4.4 percent against the euro.
Says Buffett: "The rest of the world owns $10 trillion of us, or $3
trillion net." That is, U.S. claims on foreign assets run to only $7
trillion. "If lots of people try to leave the market, we'll have
chaos because they won't get through the door." In a nutshell, the
trade deficit is forcing foreign central banks to ingest U.S.
currency at a rate approaching $2 billion a day. Buffett
continues: "If we have the same policies, the dollar will go down."
The $20 billion bet has to be put in context. Berkshire has a huge
portfolio of investments that includes $40 billion of Treasury
securities. Budget and trade deficits are likely to make dollars
worth less and bonds worth less. So the currency play is a partial
hedge of a large position that can be read as bullish on the U.S.
Still, that Buffett is making a currency bet at all is striking
given that this investor has, in his 74 years, rarely made
macroeconomic bets. He built Berkshire to a $130 billion market
value by acquiring parts or all of lots of businesses, primarily in
the insurance sector and primarily in the U.S. Now some of those
assets are antidollar assets. Example: In 2002 he bought bonds of
Level 3, a telecom company, that were denominated in euros. In 2000
Berkshire picked up MidAmerican Energy, a gas pipeline company. By
doing so, Berkshire indirectly acquired the assets of Northern
Electric, a utility in England, at a time when the pound was worth
$1.58. Now it's worth $1.94, so Berkshire has a paper gain
irrespective of any appreciation in the electric company's pound-
denominated earning power.
A continuing fall in the dollar "could cause major disruptions in
financial markets. There could be unpredictable side effects. It
could be precipitated by some exogenous event like a Long-Term
Capital Management," Buffett says, referring to the 1998 collapse of
a steeply leveraged hedge fund.
How about a soft landing for our deficit-addicted economy? Don't
count on it. We're running $100 billion a year in the hole against
China, but Buffett doesn't expect that an upward revaluation of the
renminbi (stoutly resisted, in any event, by the Chinese government)
would greatly reduce this number.
How about a rise in short-term interest rates? They used to say on
Wall Street, "Six percent interest will draw money from the moon."
Buffett is skeptical, though, that the recent tightening by Fed
Chairman Alan Greenspan will do much more than "put off the day of
reckoning."
Nor does Buffett support the notion that intervention in the
currency markets by one or another central bank can overcome the
momentum of a currency that's losing value. "Sooner or later markets
win over the intervenors. The intervenors always run out of gas,"
says Buffett.
What is absolutely necessary to bolster the dollar is "a public
policy that brings imports and exports together." Buffett has
proposed a grand scheme to force imports and exports into perfect
balance by demanding that each dollar of imports be accompanied by a
certificate bought from an exporter who moved a dollar the other
way. He concedes, using the self-deprecating humor for which he is
known, that this scheme has met with deafening silence from
policymakers.
Moving beyond cloudland to economic history, Buffett reflects
wistfully on the writings of David Ricardo, the 19th-century trade
theorist: "In those days the trade imbalances got settled in gold--
and when they ran out of gold, people stopped doing business with
you." A gold standard? More wishful thinking. But Buffett is no
goldbug. It's more that he's an antidollar bug. In dollar terms,
gold, copper and oil have all climbed in the past several years; in
euros, not so sharply.
So, Warren, what are you buying now? And what's your prediction for
the dollar next year? His answers, respectively: No comment, and I'm
not making one.
But here's a long-term perspective. He says he may hold foreign
currencies "for years and years." And he says that the electorate of
the U.S. may be strongly tempted to get out of hock by inflating
away the country's dollar debts.
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