The Hindu Business Line : Buffett bets big against dollar

His mentors, he says, were his own father and Mr Benjamin Graham, of "value investing" fame. Mr Buffett's philosophy, approach and stock picking have catapulted him to second position, next only to Mr Bill Gates, among the world's richest persons. Numbers of books and scores of articles have been written to convey Mr Buffett not only to the lay investor but also investment professionals. But none of them can match Mr Buffett's own folksy style of communication to his shareholders.

The annual report of his vehicle company, Berkshire Hathaway, is replete with investment wisdom and takes pains to explain its performance, market assessment, outlook and strategy. It does not pull punches in self-criticism when its returns are below par. The great thing about Mr Buffett is that the herd never sways him. He will not invest in concepts and companies he does not understand and thus stayed out of the dotcom boom and emerged a survivor even as many others were wrecked. Such transparency, self-deprecation and wit (for Mr Buffett is an excellent writer) are rare.

The latest Buffett fad is the dollar. For him, it is a completely new asset (or should one call it liability) class. He has bet a huge sum - over $20 billion - on currencies in positions against the dollar, rivalling those of the other famed investor Mr George Soros, who heavily sold the pound just before its collapse when the UK pulled out of the European Monetary Union.

Mr Buffett makes an extensive case for the dollar's decline (Business Line, March 13). Savings rate in the US is close to zero. It is on a consumption spree financed by (at present) willing foreigners. As a result, their claims on the US now aggregate as much as $3 trillion and are growing at the rate of $1.8 billion per day.

As the US seems largely unwilling or unable to close its consumption-savings gap, Mr Buffett sees a point of time when the attraction of US assets will fade. That would be the moment of truth for the dollar. It is a well-argued case. Mr Buffett's thesis runs counter to Federal Reserve Chairman Mr Alan Greenspan's view that the US's international trade deficit can be financed without disruption in financial markets.

But Mr Greenspan's argument, for once, is wearing thin. The last few weeks have abounded in talk that central banks, the world over, are reducing the proportion of dollars in their reserves. India is also one among them. This can very easily and quickly turn into a rout for the US currency. And US stocks and bonds are bound to follow suit, causing a financial market upheaval. It will be no picnic.

A sudden unravelling of the dollar has the potential to cause a global market crash, which could spread to the real economy.

It is high time the US administration and Federal Reserve recognised the enormous risks in the current situation.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Rupee declines; securities weak

Buffett bets big against dollar

IRDA chief urges industry to build credible database

Sundaram Home expects disbursements to rise 15%

Fringe benefit tax may hit group superannuation schemes

Aviva unveils two unit-linked fund options

ICICI Lombard offers weather cover to GHCL

Allahabad Bank chief upbeat on second public offering