Sunday, December 26, 2004

Buffet bearish on dollar

This is old news, but I found the March 2004 letter from Warren Buffet to Berkshire Hathaway shareholders, from which the following is excerpted. Buffet anticipated in 2002 the sentiment only now becoming conventional wisdom among US investors. However, he does note the tendency for people who bet against the US economy to get burned :-)

During 2002 we entered the foreign currency market for the first time in my life, and in 2003 we enlarged our position, as I became increasingly bearish on the dollar. We have – and will continue to have – the bulk of Berkshire's net worth in US assets. But in recent years our country's trade deficit has been force-feeding huge amounts of claims on America to the rest of the world. For a time, foreign appetite for these assets readily absorbed the supply. Late in 2002, however, the world started choking on this diet, and the dollar's value began to slide against major currencies. Even so, prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not, they will continue to be flooded with dollars. The consequences of this are anybody's guess. They could, however, be troublesome – and reach, in fact, well beyond currency markets. As an American, I hope there is a benign ending to this problem.

Then again, perhaps the alarms I have raised will prove needless: Our country's dynamism and resiliency have repeatedly made fools of naysayers. But Berkshire holds many billions of cash-equivalents denominated in dollars. So I feel more comfortable owning foreign-exchange contracts that are at least a partial offset to that position.


Anonymous said...


The italicized type is hard for me to read :(

Anonymous said...

There has been little risk since the recovery from the bear market began 2 years ago in simply buying the Europe Index or European country indexes at helpful valuations and holding. Valuations have been favorable in Europe, and the market parallels America's save for currency differences.

Anne, here and above, squinting at italics :)

Anonymous said...

We should not take lightly the middle level distortion of development plans in China. This is a traditional problem, and there needs to be increased attention paid be the leadership to providing for balances for redress. The problems could be crippling in different sectors.


Anonymous said...

Economic View: The Risky Assumption in Social Security Change

December 26, 2004

THE familiar disclaimer in ads for investment vehicles and
money managers of all sorts is: "Past performance is no
guarantee of future returns." It probably sounds obvious to
anyone who has ever played the markets. So why, in
proposing changes to Social Security, has the White House
ignored that counsel?

When President Bush set up the Commission to Strengthen
Social Security, part of its mandate was to come up with a
plan that included individual portfolio accounts. The
commission's mathematical models assumed that such accounts
would always be split 50-50 between stocks and bonds. In
addition, the commission chose to assume that stocks would
offer an average annual return of 6.5 percent after
adjusting for inflation, and that bonds would pay about 3

The assumptions about returns came mainly from historical
averages. And to some experts, that seemed reasonable
enough. "I'm not sure what else one would do," said Robert
F. Stambaugh, a professor of finance at the Wharton School
of the University of Pennsylvania. "Over long periods of
decades, it seems like average returns and risk are fairly

Others begged to differ. "If you look back at what has
happened, especially in the last 20 to 25 years, we've had
two huge boosts to asset returns, both of which are now
spent," said Edward F. Keon Jr., chief investment
strategist at Prudential Equity Group.

The boosts that Mr. Keon referred to were the Federal
Reserve's successful war against inflation and an upward
trend in companies' profitability. "When profitability is
high, it tends to fall, when it's low, it tends to rise,"
he said. "Future profit growth is likely to be less than
the profit growth over the last 50 years."

Taking a longer view, Mr. Keon said, a third factor has
bolstered returns over the last century: the doubling of
the average valuations of companies, as measured by
price-to-earnings ratios. "Back in 1926, the price-earnings
ratio was roughly half what it is today," he said. "Putting
aside whether you think this change in valuation is
sustainable, I don't know anyone who thinks it's going to
double again."

Taking those factors together, Mr. Keon predicted that
returns from the stock market in the next 40 to 50 years
would be only about two-thirds as high as the estimates
used by the commission.

Richard Bernstein, chief quantitative strategist at Merrill
Lynch, offered another reason for pessimism on both stocks
and bonds. "Our view has been that the No. 1 rule of
investing is that returns on capital are highest where
capital is scarce," he wrote in an e-mail response to
questions. "Right now, courtesy of the Fed's liquidity and
their encouragement of investors to take more risk, there
is no asset class that is starved for capital. That's why
we think asset returns, across the board, will be muted
relative to current expectations for perhaps quite some

Given that some of the most senior people who earn their
money predicting the stock market are so bearish, why have
historical returns received so much attention?


Steve Hsu said...


Is it really true that euro-area markets simply mirror US markets, modulo currency differences? That doesn't seem quite right given the differences in economic growth rates.

Having said that I wish I had allocated more of my portfolio to european equities over the last couple of years...

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