Somebody Is Willing to Bet That the Dollar Will Decline

From Reuters, via the Financial Times:

FT.com / Companies / US - Berkshire Hathaway loses currency bet: Warren Buffett's Berkshire Hathaway lost $310m in the first quarter from betting against the US dollar, but has nevertheless maintained its roughly $21bn stake against the greenback, the billionaire said on Saturday. At Berkshire's annual shareholder meeting, Mr Buffett said Berkshire expects... to announce an insurance acquisition worth less than $1bn, which is barely 2 per cent of the company's $44bn cash stake...

Comments

[Steve]

Warren Buffet playing with currency? Betting against the US economy?

I thought Buffet shied away from forex trading...

[unknown]

He's been doing this for a while as the article says.

So, what do folks think he's betting for... the Euro seems high. Can't play in Yuan. ?

[anne]

Investing internationally is simply gauging where there is relative value. Warren Buffett for several years has found more value in several foreign currencies than in the dollar. The reason is not difficult to understand. We have a minimal level of household saving and a fierce and growing government deficit. So, we have a fierce and growing trade deficit that requires more than 2 billion dollars in international capital inports a day to support.

We are exporting dollars, and the dollar has already declined significantly for several years against the Euro and several other currencies. Since there is no reason to believe American fiscal policy will soon limit the growth of government deficit, nor is household saving soon likely to markedly increase, there is every reason to expect the trade deficit to grow faster than the economy. There is no reason to expect the dollar will strengthen against a basket of international currencies for more than limited periods.

Warren Buffett's hedges against the dollar have been successful these last years, and are prudent investments for Berkshire Hathaway shareholders. The hedges are also a warning that we are weakening our long term economic health by borrowing enough that we are paying more in investment income abroad than we are collecting in income. We have a long term saving problem, and little prospect of beginning a resolution.

There is reason for concern.

[anne]

The prime immediate concern would be a rise in long term interest rates if the dollar continues to lose value. Low long term rates allow the Federal reserve to continue the short term tightening cycle with a sense that the economy will slow gently. What of a spike in long term rates while the Fed tightens? What of falling long term bond prices? There is my worry.

[anne]

http://www.nytimes.com/2005/05/01/business/yourmoney/01INSURE.html?pagewanted=all&position=

For Buffett, the One That Got Away
By TIMOTHY L. O'BRIEN

TOMORROW morning, Warren E. Buffett and his board will gather in Omaha to consider the merits of three executives he considers likely to succeed him one day as Berkshire Hathaway's chief executive. Their names are still a closely guarded secret, but all the candidates work for Berkshire and none are older than 60.

The directors' conclave is routine, part of an assessment of potential successors that Mr. Buffett conducts after Berkshire's annual meetings, the most recent of which was yesterday. But as Mr. Buffett approaches his 75th birthday, the financial powerhouse he began assembling 40 years ago confronts challenges that are anything but routine.

Berkshire has amassed a $43 billion stockpile of cash and other liquid assets that it has been unable to unleash. Its core insurance operation is emerging from an unusually tumultuous period. And then there is the General Re Corporation, its largest acquisition - and its biggest black eye. Not only has the payoff from that 1998 purchase failed to materialize, but General Re has also been swept up recently in regulatory investigations of insurance industry abuses.

Berkshire is expected to overcome each of these challenges, some sooner than others. And Mr. Buffett, whose personal fortune exceeds $40 billion, has a rare combination of discipline and insight that has allowed him to produce stellar returns for decades. But in the unforgiving argot of insurance actuaries, there is now both mortality and morbidity risk surrounding this legendary money manager. This year, perhaps more than in others of recent memory, his longevity looms large.

"A lot of what makes Berkshire tick is Mr. Buffett," said Keith Buckley, a managing director at Fitch Ratings, a firm that monitors insurers. "They are one of the only companies I can think of where they can have that much cash and can say to investors to be patient because they know when the time will come to use it properly. That's entirely because of Mr. Buffett's presence."

Fitch recently downgraded Berkshire's credit outlook to "negative" from "stable," noting in a research report that Fitch "does not believe that Mr. Buffett's talents can be easily replaced, or that Berkshire's current strategies would be sustainable in his absence."

Like a veteran poker player with deep pockets, Mr. Buffett is known for pushing in his chips whenever he believes he holds great cards - and for simply folding until he sees a deal that meets his standards. But what happens to the game, and to a company that so directly reflects its founder's fertile imagination, when the champion no longer sits at the table?

While there are many avenues for exploring Mr. Buffett's storied career, the $22 billion General Re acquisition is instructive for what it says about Berkshire's operations, strategic goals and future....

[anne]

Also, in case you were wondering:

http://quote.bloomberg.com/apps/news?pid=10000006&sid=aGh_OPpEs3_4&refer=home

Buffett and Munger also told shareholders they oppose U.S. President George W. Bush's plan to allow privatization of Social Security because the government has a duty to take care of the country's elderly.

``The Republicans are out of their cotton-picking minds on this issue,'' said Munger, a self-described right-wing Republican. Social Security is ``one of the most successful things that the government has ever done.'' ...

[Eurodollar]

Brad- Are you putting your money where you mouth is and betting against the $ as well?

[tante aime]

Cupid, Lend Me Your Bow

So let me get this straight....

Berkshire Hathaway, one of the most expensive stocks in the world is not an equity or royalty share, but only an index share of the underlying value of the BH holdings?

And those holdings primarily include insurance stocks which hold exposure to hurricanes, typhoons, tsunamis, avian flu, AIDS, BSE, GMO, rampant global terrorism and a generally aging, bankrupt, real estate bubbled, food and energy deprived population?

And to hedge against those global exposures, the chief strategist is betting hard against the USD currency that those same index shares are paid out in, in the country that those shares are listed on?

And that the chief strategist is now past the actuarial drop-dead point and hasn't yet selected a successor, or created a legacy knowledge base for how to prevail in the future, in a US financial and political milieu now more like a jibbering dancing-monkey Deuteronomy II.

And they want $90,000 *a share* from our life savings for this index fund, when they're betting that our HAGL payout in USD will be far less than our original payin, barring hell or high water, and if they don't drop dead first, in which case it will be worthless!?

Et à ce qu'est le monde venant?!

A blogger observed the other day that we used to get our pay in an envelope, in silver certificates with change in silver and copper coins. I can remember counting out every single penny to make sure payroll got it right (and finding the occasional Indian Head or Buffalo or Liberty as a bonus).

Then somewhere, somehow, Nixon did his thing, and Reagan did his thing, and then we end up with an envelope, with a piece of paper in it, saying how much was transferred directly to our bank, which now, instead of coaxing you with attractive investment deals for deposits, instead has your money, and keeps sending you their credit card application, trying to coax you into borrowing your own money back from yourself at 28% API?

And no doubt that same bank is hedging like hell, using your life savings, against the USD, not that it benefits you, you'll still only receive a paltry 2.75% less fees, check cashing and ATM withdrawals, in USD's that now are worth nearly 40% less than when Bush took office, and with annual inflation, real food and energy inflation, cost nearly double what you can make at your bank!?

Il est incroyable que nous ne croyons pas que le monde,
et que ce qui circule vient autour, soit rond!

Read "Wall Street" by Doug Henwood, and "Hard Landing" by Brad DeLong, and then tell me why Warren Buffet is still a financial icon, and such a hot prognosticator.

Me, I'm buying Argentinian ARS's and Canadian loonies, and investing in wheelbarrows and rye bread futures.

[daisycolorado]

Buffet is a brilliant investor but has a terrible long run record as an economist.

The Euro has had a great run over the past 3 years, there are a lot of reasons to think that run is over.

A cheaper dollar should start helping on the trade side, higher US interest rates and lower Euro ones also help. A 'No' vote on the EU constitution by France may well turn out to be a tiping point.

Trees never grow to the sky, and major currencies rarely go in the same direction forever.

[ErikR]

daisycolorado wrote:

"Buffet is a brilliant investor but has a terrible long run record as an economist."

Perhaps that should read: Buffett is a brilliant investor BECAUSE he isn't an economist.

How many economists are great investors?

[Jennifer]

Why is Warren Buffett an icon? I suppose when you build a company that manages to grow in stock value at double the growth of the S&P Stock Index for 5 and 10 and 15 and 20 and 25 and 30 and 35 years, you become an icon. When the growth is accomplished by treating thousands of employees well, along with shareholders, I imagine you deserve just a little credit.

[Thomas]

None - Publishing is highly detrimental to profitability. Market prices reflect the best current understanding of underlying values, and the only way to consistently beat the market is to have either superior information (insider trading. Investing in a field you understand much better than the weighted-average investor. In that field.) or to posses superior analytical tools/theory. Economists can only fit into to second category and only if they make a groundbreaking academic breakthrough and refrain from publishing !
If they do publish prices will change to reflect the new superior understanding and their edge is lost.
In this vein it must be noted that you should never trust a single word a highly visible amd succesful trader says about markets. The only time shuch a person would benefit from honesty is if they are engaged in a investment move where abritary amounts of additional additional capital would increase overall returns. Those are somewhat rare.

[anne]

Whether the dollar gains or loses value against the Euro from here, in the near or longer term, we can not tell. But, I have a hard hard time making a case for a generally strong dollar given an American need to import more than 2 billion dollars a day in capital to finance our lack of lack of household saving and government deficit.

[me]

"A cheaper dollar should start helping on the trade side"

Three years later and we still hear this story line. Just what is the US going to export? CEO expertise? Not televisions, DVD recorders, computers, energy, monitors, call centers, automobiles, education, textiles, sugar, cotton? At some point it becomes apparent we make nothing the rest of the world wants. They will only buy so many cigarettes and missles.

[Fred]

I’m curious as to why no one ever discusses purchasing power parity. According to one PPP index the euro is about 17% overpriced compared with the dollar (http://fx.sauder.ubc.ca/PPP.html). The yen is 28% percent overpriced. The Chinese yuan is almost 60% undervalued (based on the slightly less accurate Big Mac index). I understand that developing countries tend to have undervalued currencies in proportion to relative income levels so perhaps the yuan will appear undervalued based on PPP for a little longer.

I would also guess that based on purchasing power the dollar is undervalued vs. the aggregate of other currencies normalized to their respective GDPs (or at least vs. the currencies from developed countries). Wouldn’t the dollar therefore tend to rise over time vs. the Euro, yen, and other major currencies (except the yuan, yon, etc) . Perhaps inflationary expectations trump the PPP (but Treasury bond buyers don’t seem to have any inflationary expectations). However, why are there not better long-term expectations for the dollar vs. the overvalued currencies on the PPP chart? (I realized the twin deficits don’t look good but the sheer volume of relatively low priced goods and services in the US would seem to be protective of the dollar. And it seems like we still have things to sell: DVDs/movies, vacations, retirement homes, software, timber, coal, wheat, insurance, financial services).

[anne]

Careful where data is taken from :) The dollar against floating currencies is neither under nor over valued, for the value is set by the market each day. Against currencies pegged formally or loosely to the dollar, the dollar may be under or over valued. The need we have for several billion dollars a day in foreign capital to support our domestic and forein deficits, suggests to me strongly indeed that the dollar is not likely to strengthen long against most floating currencies and is overvalued against most pegged currencies. Warren Buffett may still know a thing or so about value :)

[anne]

ME

Resource adjustment would call for fiscal policy assistance, if it is not to be wrenching in parts of the labor market, but this is not likely in the near future.

[howard]

btw, steve, as a long-term berkshire investor, i try to follow most everything that buffett and munger say in public, and in a recent interview that was carried in outstanding investor digest (a publication i heartily recommend to anyone who likes value investing) with munger, he said that as far as he's concerned, buffett is better than ever at the game, and cited his beginning to trade currencies as one of the examples of how buffett is getting better with age.

i personally haven't a clue as to how to play the dollar, but i do have a clue that warren buffett generally has a clue....

[chris]

What we have to sell a small suggested sample:

DVDs/movies: easily copied

vacations: compete with the rest of the world. We decided to erect visa barriers. Once we poorer we can compete better with Thailand; there will be more people willing to work in the sex industry at lower prices. That's great for attracting golfing Japense, Chinese, Taiwanese, English, Swedish, etc, tourists.

retirement homes: visa problems, over priced, competes with the rest of the world.

software: easily copied. Biggest company has hit a brick wall in innovation but still enjoying steady sales.

timber: competes with New Zealand, Canada, Indonesia, Malaysia, other nations, if our standard of living dives 40 % we can better compete with N. Z.

coal: in abundance everywhere. Do you want to breathe or heat?

wheat: the other way we can compete is with subsidized pricing which we already do. This is more of throwing a bone to a favorite voting block than an export promotion strategy. Falls into the same sector as timber above

insurance: no barriers to the talent needed to enter this business. Also local offices are opened staffed with locals. How many Floridans are going to leave there to work in some small city in Germany or China.

financial services: We do have a talent in blowing bubbles. Does any one remember the fraud from the internet changes everything era. Do you think the rest of the world forgot that? I guess we did. Can we export fraudsters cause otherwise financial talent is available everywhere. Do we have a better talent at organizing that talent so at least the profit dollars flow home if not all the staffing pay dollars?

We did have a good couple of weeks in airplanes.

[John]

howard -

I'm a very wealthy guy, and what you say is exactly why I just gave Berkshire Hathaway a huge chunk of money.

I see it this way:

Warren has seen just about every up and down the markets have ever taken, and beaten almost all of them. I see his age right now as an asset, one that's brought wisdom I couldn't possibly have.

We are in unprecedentedly complex economic times.

Who better to manage my money in such tricky times than the wisest and most successful investor of all time?

I'm fairly certain 1) he can play the down side as well as anyone, and 2) he'll have a hundred great ideas on where to put my cash on the other side.

I suspect he sees the coming crises as the biggest opportunity in a long time.

And as we all know, he takes action in such situations, and as 40 years of numbers show, he nearly always wins.

I'm a CEO, and one of the things that's commonly said is that a good CEO always hires people smarter than him. Well we have a very difficult situation here, and I sure want Warren, and not me, to handle it.

[Fred]

I like the "financial services: We do have a talent in blowing bubbles"

Anyway, I was really trying to find out why PPP is not considered indicative of long-term movements in currency among the developed countries.

[howard]

John, not only do we agree with each other, but i'll take this moment to note that, by "long-term" investor in Berkshie, i mean since 1991.

The single greatest regret of my investment career, such as it has been, was that right after the October '87 crash when Berkshire was trading at 2700, i gutchecked on basically throwing every little bit i had into berkshire shares, which, if i had, would have enabled me, too, to begin my posting "i'm a very wealthy guy."

As he would be the first to admit, buffett can no longer provide that kind of result at the current scale of the operation, but he is still as good at allocating capital wisely as there is....

[John]

howard -

Well if there's a last gasp in him and a clear opportunity, my guess is, this is it.

We seem to have an incredible situation in which nearly everyone with any financial sophistication knows what sorts of things must happen, the only question is timing. But, happy miracle, markets still haven't priced it in.

[John]

howard -

Well if there's a last gasp in him and a clear opportunity, my guess is, this is it.

We seem to have an incredible situation in which nearly everyone with any financial sophistication knows what sorts of things must happen, the only question is timing. But, happy miracle, markets still haven't priced it in.

[me]

Very good Chris,

Here is a timely article from today;'s WSJ.

USlower economic growth in parts of the world is translating into fewer exports for many U.S. manufacturers, who had counted on strong foreign sales to help fuel expansion.

The problem is linked mainly to Europe's and Japan's sluggish growth, which is curbing the appetite for U.S.-made goods in those regions. But Canada is a concern, too. U.S. exports of goods and services grew 7% in the first quarter, according to the Commerce Department, up from 3.2% the quarter before. However, export growth was stronger in the early part of last year and then moderated sharply. As a result, most economists are predicting export growth for all of 2005 will fall well short of last year's overall performance.

Cliff Waldman, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va., group that represents large manufacturers, recently cut his projection for this year's export growth to 5.7% from 8% and cautioned that he sees "downside risks" in this area. He blames Europe and Japan but also has growing concerns about Canada, the U.S.'s largest trading partner. "Canada is entering a weak patch and it could turn into something worse," Mr. Waldman said.

Softer export growth is only one problem facing U.S. manufacturers. Rising energy prices have dragged U.S. economic growth to a two-year low. Since the bulk of what U.S. factories produce is sold domestically, that means fewer sales at home. U.S. gross domestic product, the broadest measure of all goods and services produced, rose at a disappointing 3.1% annual rate in the first quarter, down from 3.8% in the fourth quarter. Durable-goods orders fell 2.8% in March.

Slower export growth will make it that much tougher for the U.S. to rein in its trade deficit, though most economists say surging imports are the crux of that problem. Even rapidly growing exports are unlikely to make a dent in the deficit until the U.S. curbs explosive import growth. U.S. exports grew 8.6% last year.

The U.S. is increasingly an exporter of capital equipment, so weaker growth is hitting many equipment makers. Nordson Corp. of Westlake, Ohio, recently cut its revenue target for its fiscal second quarter, ended April 30, and for its full fiscal year, pointing to softer-than-expected international sales, particularly in Europe and Japan.

"World-wide demand for capital goods has decelerated," said Nicholas Pellecchia, the company's vice president of finance. Nordson makes machines that apply adhesives, sealants and coatings in factories, so it is highly sensitive to trends in business investment. Mr. Pellecchia said companies in Europe and elsewhere suddenly appeared to grow more cautious about investing around January. Demand in parts of Asia outside Japan has also moderated, though it remains robust, he said.

Mr. Pellecchia added, however, that Nordson sees "this more as a short-term issue of a...pause, rather than a longer-term structural issue." The company doesn't expect export growth to continue decelerating.

Another example is Rockwell Automation Inc. of Milwaukee. The maker of factory automation equipment says a "systematic slowdown" in Europe is hurting its exports. James Gelly, the company's chief financial officer, said that during Rockwell's fiscal second quarter, which ended March 31, business grew 33% in China, 57% in India, and 22% in Latin America, while Europe declined 1%. Germany, Europe's largest economy, was especially troubled, with a decline in the double-digits for the period.

Rockwell also believes export growth has slowed but will stabilize at a lower level. Based on the number of engineering studies under way -- the planning processes that precede major automation projects -- the company expects global strength stretching into 2006, Mr. Gelly said.

Richard DeKaser, chief economist with National City Corp. in Cleveland, said aggregate demand in the rest of the world simply isn't strong enough to pull in more U.S.-made goods. "That's been neutralizing the favorable effect of the declining dollar," he said.

Some companies continue to see surging export growth. Haas Automation Inc. of Oxnard, Calif., said its exports of machine tools to Europe have increased 40% so far this year. "Driving the growth, in part, is the favorable exchange rate," said John Roth, Haas's director of customer service. But the company has also expanded its sales and support efforts in foreign markets.
.S. Exporters Face Harsh Climate

[anne]

John

"We seem to have an incredible situation in which nearly everyone with any financial sophistication knows what sorts of things must happen, the only question is timing. But, happy miracle, markets still haven't priced it in."

Interesting and important comment, and exchange.

[Jozo]

- Re: USA sales
Yes, US of A sells only intangibles/luxuries to rest of the world. This is why IP, copyright etc is so huge issue for US policymakers. Without Hollywood movies and Microsoft tax and recently Mosanto crops, trade deficit would double comparing to today’s levels.
I will never underestimate USA ability to "IP taxation" on rest of the world for long, long years.

[liberal]

Fred wrote, "Anyway, I was really trying to find out why PPP is not considered indicative of long-term movements in currency among the developed countries."

My impression---and I'm not that well-read on this topic---is that (a) currencies *don't* normalize along the lines you suggest, even over decades, (b) economists don't seem to know why.

Others who are actually enlightened on this topic, please chime in.

[liberal]

unknown wrote, "So, what do folks think he's betting for... the Euro seems high. Can't play in Yuan. ?"

Good question; I wanna know, too.

Maybe other Asian currencies like Yen?

[Randolph Fritz]

"How many economists are great investors?"

I believe JM Keynes was quite successful.

The problems with the RMB Yuan as an investment vehicle are that it is controlled by the Chinese Central Bank and that China has very poor accounting standards.

My personal guess for the abandonment of the dollar as a reserve currency puts it out around the beginning of 2009. Shall we start the Semi-Daily Journal betting pool for the exact three-month period?

[weco]

Fred,

It depends on what you mean by 'long run'.

PPP is generally considered to be a very bad guide for anything less than ten years. (It works very well at 20-30 years.)

And most of the economy are not tradable anyway, so PPP is irrelevant in those sectors.

(See Obtsfeld and Rogoff, 1996, for more details.)

Secondly, Euro is currently 'overvalued' because it's bearing the main burden of adjustment. If other countries exchange rates remain fixed, then the Euro will have to continue to appreciate.

Finally, it should be noted that economists are not very good at predicting exchange rate movements. Scratch that, Economists are rotten at predicting exchange rates. Dornbusch Overshooting model only explains about a third of exchange rate movements and Uncovered Interest Parity performs so badly that most professionals actually do the opposite of what UIP tells them to do.

PS: How could all of you forget the US's comparative and absolute advantage in creating debts? US can always export more debts, especially now that we actually have a 'surplus of savings' globally. The world is full of people who doesn't know what to do with their hard-earned savings.

[J Thomas]

"In this vein it must be noted that you should never trust a single word a highly visible amd succesful trader says about markets. The only time shuch a person would benefit from honesty is if they are engaged in a investment move where abritary amounts of additional additional capital would increase overall returns. Those are somewhat rare."

But that does fit Buffett this time, doesn't it?

He lost money (so far) betting against the dollar. But the more people do it, the more likely his investments will pay off, right?

[J Thomas]

"Uncovered Interest Parity performs so badly that most professionals actually do the opposite of what UIP tells them to do."

If they use it to decide what to do, there's an element of self-fulfilling prophecy or self-negating prophecy to it.

The latter this time. Too bad, if it had only gotten the reputation of being gospel they might follow it enough that it would always work, which would persuade them to make it always work....

I wish I had a job like that.

[J Thomas]

"We seem to have an incredible situation in which nearly everyone with any financial sophistication knows what sorts of things must happen, the only question is timing. But, happy miracle, markets still haven't priced it in."

How would they price it in? In a liquid market, you can make money today by playing the risky game, or you can get out of the game and make no money. Do you take the risk today or do you decide that the risk has increased enough since yesterday that it's time to quit?

I read that right after a hurricane, you can't get insurance on beachfront property at any price. But then over the next 20 years or so the insurance companies being competitive and all gradually start offering better deals until by the next big destructive hurricane they're fully invested. (But that's just what I read, maybe over that time they're getting the government to increasingly underwrite it so they don't take losses regardless.) If the story is true, it indicates that this sort of thing happens to trained insurance professionals. So why wouldn't investors do it too?

It's kind of like the old philosophy chestnut, "If you were sitting in a comfy chair in front of a nice fire with a snifter of brandy, completely comfortable in every way, and you knew you'd die in ten minutes unless you got up, how long would it take you to get up?"

It's only people with illiquid investments who need to worry about the long term. In a liquid market, if you know a crash is inevitable sometime, then the question isn't whether to get out. The question is when to get out. What is the last possible moment to get out, that will maximise profits? Unless you believe you're good at recognising the last possible moment, you wouldn't be playing that game anyway.

Sorry to belabor the obvious.

[anne]

"The world is full of people who doesn't know what to do with their hard-earned savings."

Suddenly, we have a new conventional wisdom that claims all have excess savings and all must throw such savings at us. The more I consider this, the less evidence I find and the more lacking in realism it seems. There are many savings outlets internationally, what is swelling America's import of capital is not private savings but central bank flows to support trade from South Africa to Brazil to Korea and on.

[anne]

Interesting comment, J Thomas. The insurance cycle you project is familiar :)