June 15, 2005


How Buffett tripped over the dollar: The greenback's big rally against other currencies has proved Warren Buffett -- and other dollar bears -- wrong. Here's what Buffett missed. (Jon D. Markman, 6/15/05, MSn Money)

Six months ago, the value of the U.S. dollar was on the firing line as it plunged to a record low vs. the euro. Amid fears that a united Europe would surmount the spendthrift United States as a safe haven for financial assets in a tumultuous world, investors worldwide -- led by noted Nebraska sourpuss Warren Buffett -- heaped scorn on our currency and scolded U.S. lawmakers to get the federal deficit under control.

But a funny thing happened to all those dollar bears. Their contempt for U.S. economic freedoms hasn’t amounted to a hill of bill of beans, and their positions have been smoked. The dollar has rallied massively since the start of the year against all other currencies, reflecting a swift, stunning paradigm shift in the way that global political risks are priced.

Buffet, who reportedly lifted his bet against the buck to a position of $22 billion and counting in the first quarter this year, isn’t sounding quite so smug anymore. Normally an equity investor with liberal social views who rarely made forays into the foreign exchange markets, he has had his head handed to him by more experienced currency players. Although his anti-dollar attack worked from 2002 through 2004, since then he has been forced to pay for attempting to mix politics and money. [...]

Buffett has told shareholders that he took his original position based on a belief that Bush policies had led to unsustainable twin deficits in the federal budget and the balance of our trade with the world. But guess what? Due to improved tax collection, higher payroll earnings, a modest decline in overall government spending and better-than-expected corporate earnings, estimates of the U.S. budget deficit are steadily on the decline. The 12-month federal deficit has narrowed to $339 billion, or 2.8% of GDP, according to Ned Davis Research. Receipts have been growing twice as fast as spending over the past 12 months, as both corporate and individual tax contributions have been stronger than estimated. [...]

A country’s currency can be considered in a way to be analogous to a company’s stock. When central banks and trading partners are positive on a country and its ability to be an effective store of value, they simultaneously buy its currency and sell the currency of other countries. When they believe that a country’s ability to pay its debts is eroding, either due to loss of vitality or inflation, then they sell the currency.

The bottom line now is that, according to Bloomberg data, holdings of U.S. government debt by international investors and central banks rose by $93.2 billion, or nearly 5%, to $1.9 trillion last quarter. As the dollar has risen in value, it has helped foreign investors retain the value of their U.S. assets. The dollar’s strength has also kept inflation down -- further preserving the value of bonds’ coupon payments.

Our recent confluence of happy events -- stronger dollar, higher U.S. bond prices, lower bond yields and lower inflation -- has further widened the gap between our economy and that of the disorganized, disrupted and disturbed Europeans. [...]

What Buffett and his cohorts failed to understand as they thumbed their nose at the dollar was that it’s impossible for Europeans to sustain a single currency without a commitment to a single European political and economic policy.

On the one hand, you can admire him for putting his money where his moth is and betting on the future of socialism against that of capitalism. On the other, what the heck was he thinking?

Posted by Orrin Judd at June 15, 2005 7:47 PM

A countrys currency can be considered in a way to be analogous to a companys stock.

No, it really, really can't.

Posted by: David Cohen at June 15, 2005 8:24 PM

As I've mentioned before 6 months ago all the fx traders and economists I ran into at work were predicting the euro would blow by the dollar in importance and the dollar would be a 2nd class currency. So Buffett wasn't alone in his thinking but the fact that he mixed/justified it with liberal ideology made it more obnoxious.

Posted by: AWW at June 15, 2005 9:17 PM

The guys at work were just parroting the MSM talking heads. Double deficit and all that garbage. I think I have been posting here for longer than that, that the euro's rise was a reflection of the weakness not strength of European economies.

Posted by: Robert Schwartz at June 15, 2005 10:21 PM

these guys are all geniuses until they aren't. buffet had a good run that gave the illusion of mastery. but in the end, he looks to be just another gambler whose streak has ended. people like gates and buffet remind me of dung beetles, in their mindless accumulation of wealth.

Posted by: cjm at June 16, 2005 12:33 PM

Has Buffett thrown in the towel yet? How would we (or Berkshire shareholders) know?

Is Bill Lerach game enough to poke around? Or are the laws in NE slanted to favor business (rather than those in CA, which made Lerach a multi-millionaire)?

Posted by: jim hamlen at June 16, 2005 10:29 PM

Anyone know of positions Soros has taken through this?

Posted by: Genecis at June 16, 2005 11:14 PM