Posted on 03/14/2006 1:48:55 PM PST by LM_Guy
In his annual letter to the shareholders of Berkshire Hathaway, Warren Buffett acknowledged that his bet against U.S. currency had collectively cost them almost $1 billion. Buffet wrote, "My views on America’s long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged. My conviction, however, cost Berkshire $955 million pre-tax in 2005. ..."
In recent years, Buffett has increasingly used his platform as an extraordinarily skillful mutual fund manger to criticize the economic performance of the country under President Bush. In last year's letter he announced that he had been significantly increasing his position against the dollar, citing a growing trade deficit as the reason. Buffett's statement that America was moving from being an ownership society to a "sharecropper’s society" and other criticisms received quite a bit of media attention.
As the chart shows, rising trade deficits cannot be presumed to cause a falling dollar. The data show the dollar strengthening against the euro at a time when trade deficits are rising. This also happened during the Reagan Administration. It is consistent with supply side economics, which sees the value of the dollar determined by the tightness or looseness of our central bank. A free flow of goods, services and capital across borders does not seem to have had any negative impact on the value of the dollar.
http://www.humaneventsonline.com/images/2006-03-14_Bowyer_Chart_lg.jpg
Not all of them.
40 seconds behind you.
Well sure. I'll make a prediction: the Dow will go to 13,000. I don't have any idea when but it will.
I'll also predict that the dollar will lose value and then regain it - and then lose it again.
Buffet is only good at one thing: buying good companies at deep discounts and holding on for ten years.
By then Mr. Market has repriced the company correctly.
None that I can see either. The idea should be that a cheap dollar makes US goods easier to sell. What really ends up happening is that a trade surplus comes with high unemployment, but spikes in the value of dollar seem to happen whenever they happen.
Increasing foreign bank holding of dollars reduces the domestic effects of the inflation that Bush and the Fed have been hustling since W announced the "devaluation" of the dollar shortly after he was elected. In the era of fixed and minutely managed exchange rates devaluation meant that the government increased the number of dollars it would permit/require a holder to exchange for a given foreign currency. With the advent of market valuation of currencies, devaluation just means that the government is increasing the rate of money creation. The benefits are only temporary and quickly reversed and then neutralized as users of money readjust their own evaluations. Devaluation is not quite "useless," however. To the extent that foreign governments increase their holdings of devaluing dollars they are importing our own inflation and reducing its effects here. The foreign banks are increasing the number of dollars they hold but not necessarily the value of their dollar denominated assets. Devaluation also serves to reduce confidence in the money and makes economic calculation more difficult and thus less efficient, acting as a drag on the devaluing/inflating economy.
Exactly.
What really ends up happening is that a trade surplus comes with high unemployment.
And high unemployment happens when Unions gain power and "minimum wages" go up. So the other markets then have to rise.
Let's, but spikes in the value of dollar seem to happen whenever they happen.
They happen when they happen so that the same rate of exchange happens everywhere. The US Selling a .75 cent can of Coke to Mexico where they are paying 12 pesos: the same price, ultimately everywhere regardless of type or name of currency. If say, Japan makes and distributes more money -- the rates of exchange will change around the world accordingly. That's the rule about exchange ranges: The same "value" (price) of goods must be "even" all over the world. And therefore, the spikes in re "rates of exchange".
Make sense, but then why is it that the biggest recent devaluations were '85 - '88, and 2002 -'04 (look at the value of dollar, again), and both times the economy soared.
To the extent that foreign governments increase their holdings of devaluing dollars they are importing our own inflation and reducing its effects here.
Bears a repeat. :)
Of course, you know the familiar JM Keynes response?
W is a professed Keynesian, albeit a "conservative" one. That just means that he desires outcomes that conservatives desire but he has a wholly inapropriate toolkit.
On balance, he's $2 billion ahead right now. Following is the entire paragraph from page 17 of Buffett's annual letter to the shareholders of Berkshire Hathaway.
My views on America’s long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged. My conviction, however, cost Berkshire $955 million pre-tax in 2005. That amount is included in our earnings statement, a fact that illustrates the differing ways in which GAAP treats gains and losses. When we have a long-term position in stocks or bonds, year-to-year changes in value are reflected in our balance sheet but, as long as the asset is not sold, are rarely reflected in earnings. For example, our Coca-Cola holdings went from $1 billion in value early on to $13.4 billion at yearend 1998 and have since declined to $8.1 billion – with none of these moves affecting our earnings statement. Long-term currency positions, however, are daily marked to market and therefore have an effect on earnings in every reporting period. From the date we first entered into currency contracts, we are $2.0 billion in the black.
As you can see, the last sentence in the paragraph that Bowyer excerpted states that Buffett is currently $2 billion ahead on his currency contracts. I'm sure that Bowyer just forgot to mention that. In any case, Buffett says that he is shifting somewhat from direct positions in currencies to foreign equities in the next paragraph:
We reduced our direct position in currencies somewhat during 2005. We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring nondollar exposure. That’s largely because of changes in interest rates: As U.S. rates have risen relative to those of the rest of the world, holding most foreign currencies now involves a significant negative “carry.” The carry aspect of our direct currency position indeed cost us money in 2005 and is likely to do so again in 2006. In contrast, the ownership of foreign equities is likely, over time, to create a positive carry – perhaps a substantial one.
That was a lot of investor money Buffett invested into the Democrat Party/Kerry campaign. I remember when he announced that he was betting against our currency and I thought to myself, "investors better bail out fast." Anything liberals touch loses profit. Once Buffett became a liberal politician rather than an investor, it was inevitable the loses would follow.
If I understand the reason correctly, its this:
1) Countries send tons of stuff here and get tons of $ in return.
2) The generally need to change those dollars into their native currency in order for it to be useful in their home country.
3) This results in many people wanting to sell dollars, hence the decline in its price relative to other currencies.
Hard to argue with that really.
In the past, that situation has been somewhat ameliorated by the $ being the world currency - which diminishes the need to sell dollars since they're useful on the world market.
But widespread acceptance of the Euro has hurt that to some degree.
Also, aren't they talking about trading oil in Euros now on some Arabic exchange?
"I'll also predict that the dollar will lose value and then regain it - and then lose it again."
There's the difference between what Buffet is saying and what you're saying. He's not predicting a random rebound in the dollar absent changes to the underlying trade deficit.
So you're telling us that Wil Ferrel never existed in the first place? ;-)
"The value of the dollar is directly related only to the number of dollars in circulation as opposed to the market demand for dollars."
And the demand for dollars is a measure of how many people want to buy as opposede to sell them. And - except for currency speculators - that relationship is directly related to our trade deficit. How else do you think people end up with dollars but instead wanting their own currency? Its by shipping us tons of goods and getting payed in dollars. No?
Wow, the import credit idea is pretty good!
Except it doesn't happen.
Over the past few decades the balance of payments went back and forth from capital to current, inflation went up and down, and the dollar's exchange rate went up and down. [poster's note to the internet-challenged: right click on each of the three links and open them in "New Window" --and compare] There's no one trend that had any reliable predictable relationship with any of the other trends. Buffet likes getting his name in the paper and getting Democrat politicians to hint about making him some kind of economic king pin or something. He likes it so much that he'll make promises to gullible investors that if they bet on Bush being a miserable failure they'll make a fortune.
Here's an actual proven case where some people actually believed Bush's trade policies were bad enough to put their money where their stupidity was. They lost a billion dollars.
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