The Situation:
Two Brilliant Investors → One Common Thought!
Buffett Ups Bet Against The Dollar
Berkshire Hathaway’s Annual Report for 2004 disclosed that Warren Buffett’s investment in foreign currencies nearly doubled in the past year to $21.4 billion…and now includes the currencies of twelve nations. He offered various observations on why it is prudent to be aggressive against the dollar:
“The dollar cannot avoid further declines against other major currencies unless the U.S. trade and current-account deficits improve.”
“I don’t know when it happens. I don’t have any idea whether it will be this month or this year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that’s going to weigh on the dollar.”
“As time passes, and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world enjoys an ever-growing royalty on American output. Here, we are like a family that consistently overspends its income. As time passes, the family finds that it is working more and more for the ‘finance company’ and less for itself.”
Gates Joins Buffett’s Bet
Bill Gates, the world’s richest man and newest member of Berkshire Hathaway’s board of directors, is echoing Berkshire’s Chairman:
“The ol’ dollar, it’s gonna go down.”
—Bill Gates; Irish Times; 2/03/05
There are plenty of reasons for “Fear.”
In the very first issue of our Investment News & Wealth Report (2004), Blanchard
and Company, Inc. observed that investment portfolios are under attack. Nothing
has changed except that the unsettling aspects of the marketplace have become
significantly more voliatile. If Mr. Buffett’s theory is right, now is a good time to become “Greedy.”
Americans are accumulating more and more debt in their quest for new cars, big screen TVs and the like. Asian governments are acquiring vast amounts of U.S. dollars in exchange for American treasuries and mortgage certificates. A Chinese oil company is actually trying to buy American oil giant Unocal! Eventually, these foreign governments will have to shore up their own currency by dumping our dollars—and that will be bad news for those who own a portfolio focused mainly on paper-denominated assets. Former Fed Chief, Paul Volcker, in a recent speech at Stanford University, indicated his concern on this subject:
“Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can’t go on indefinitely.”
Mr. Volcker concluded by stating that, at some point, investors’ confidence could fade with “damaging volatility in both exchange markets and interest rates.”
That leads us to the current-account deficit—which we believe has moved into a very “fearful” zone. Today, it stands at 6 percent of domestic gross product versus 4 percent in 2000. That’s a 50 percent increase in less than five years! On June 9, 2005 the Wall Street Journal noted that as foreign debt mounts, so does the risk that investors will demand a higher interest rate or lower dollar to keep lending. Central banks will eventually respond in a very predictable fashion—in fact, their actions are accelerating now. For example:
“The last few weeks have abounded in talk that central banks, the world over, are reducing the proportion of dollars in their reserves. This can very easily and quickly turn into a rout for the U.S. currency.”
—Global news wire; 3/16/05
The European currency is no safe haven either. The euro has fallen in response to the uncertainty created when the European constitution failed to be ratified. Oil prices have recently hit an all time high about $60 per barrel and many analysts fear still higher oil prices.
And, Alan Greenspan is Acknowledging Concern
“…the short term economic outlook is playing out against a backdrop of concern about the prospects of the Federal Reserve budget…The Federal Reserve is on an unsustainable path in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years.”
—CBC Business News; 4/21/05
