Buffet and Dollar short

[Sparohok]

Quote from tomcole:

Since hes a US-dollar based balance sheet, he cant argue hes hedging his dollar value, as hes dollar-based.

Why not? He's holding a great deal of cash. It would be stupid not to diversify those cash holdings, especially if you feel that the currency you are holding is vulnerable. That is hardly a speculative position; it is basic investment risk management. And that is exactly the rationale that Buffet has publicly stated for his short position on the dollar.

The fact that Berkshire's financial statements are reported in dollars has no impact on the prudence of cash diversification. If the dollar falls, the real value of Berkshire's cash reserves to Berkshire investors in terms of their trade-weighted buying power falls as well, even if the balance sheet bottom line is unchanged.

Martin

 

[tomcole]

Not true. Hedging, diversifying and speculating are all distinctively different.

Buffet is specing and calling it a hedge. If you are a dollar-based balance sheet, it makes no sense to hedge your dollars as thats your reporting currency. You hedge your non-dollars etc. If it were in fact a hedge, his P&L effect would be minimal as he has an offset, which he doesnt. It is an outright spec position.

Diversifying means buying non-dollar equities. Not shorting the dollar.

Further, if you've lived through a sudden currency movement, suppose we wake up in the morning, and the euro is at par to the dollar. His shareholders suffer the loss which will result in lawsuits. His shareholders are paying him to find under-valued companies, not to spec currencies.

 

[Visaria]

Quote from tomcole:

His shareholders are paying him to find under-valued companies, not to spec currencies.

Are they? Is this stated somewhere? Or is this just perception?

 

[mtzianos]

Apparently Buffet feels that he has a fiduciary responsibility to protect the buying power of his shareholders, i.e. aim at POSITIVE REAL RETURNS.

Here is how the 2003-2004 "rally" of SP500 looks in "dollar-index" denomination (a basket of different currencies).

If we denominated the same SP500 in just Euro or Canadian dollar or "tangible" real values, like real-estate values, or oil, or copper, or aluminum, etc etc, it would be even lower.

 

[Sparohok]

Quote from tomcole:

If you are a dollar-based balance sheet, it makes no sense to hedge your dollars as thats your reporting currency.

An investor is concerned with gaining wealth, not dollars. For example, you would not want a company to invest cash in such a way that increased your dollar wealth while falling behind inflation, any more than you would want to increase dollar wealth while falling behind the buying power of the dollar on a global market.

Selling dollars to buy another currency is not the same as shorting dollars. Buffet has never been and probably will never be short the US dollar.

Diversifying means buying non-dollar equities. Not shorting the dollar.

So buying non-dollar equities is diversification, whereas buying non-dollar short term paper is speculation? That's bogus. They are both investments.

Martin

 

[tomcole]

Buffets net loss has exceeded US$500 million so far from his dollar spec.

So, yes, his investors have a real reason to be concerned as do regulators. Remember this is one investment to him, and his last quarter income was lost due to this position. Its very worrisome.

 

[Sparohok]

Quote from tomcole:

Buffets net loss has exceeded US$500 million so far from his dollar spec.

Wrong.

Berkshire's gains on foriegn currency forward contracts (pretax, millions):

2005Q1: -310
2004: 1,839
2003: 825
2002: 297

So, yes, his investors have a real reason to be concerned as do regulators.

So a completely legal and legitimate hedging transaction should attract attention from regulators, but only in quarters where it happens to be unprofitable?

"We may well turn out to be wrong in our currency judgements. If so, our mistake will be very public. The irony is that if we chose the opposite course, leaving all of Berkshire's assets in dollars even as they declined significantly in value, no one would notice our mistake." - Berkshire 2004 annual report

Martin

 

[tomcole]

Thats the way the world works - especially when you're betting against your own government

 

[jaronimo]

Quote from tomcole:

Thats the way the world works - especially when you're betting against your own government

Is it really betting against your own government?

Its not like he is causing it, he is only trying to profit from what is happening just like everyone else. I never heard that you could only go long dollars cause if you go short you are commie.

Isn't the dollar going down sometimes a good thing? I am no economics genius, but it seems to me that if the dollar goes down then products built in other countries get too expensive for us. And that would cause more American companies to produce those products at a price we could afford. Wouldn't that help our economy?

Wouldn't Americans spending their money on our own products not only help us, but keep us from making others rich? Why is it wrong to keep some of that cash here?

 

[fxpeculator]

Quote from lsudaytrade:

i'd like to see buffet lose his shirt

What a hater!

You want Mr Buffett to lose his shirt why, because you lost yours?