Buffett Worries About High Risks of ‘Significant Inflation’ Around Globe

Monday, 03 May 2010 11:56 AM

 

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Warren Buffett says he is worried about the prospect for "significant inflation" in the United States and elsewhere, and that the Greek debt crisis has the potential for "high drama."

Buffett also said he is seeing real signs of improvement in the economy, especially in manufacturing, though it will take another year for a sustainable housing recovery to take hold.

Buffett also said his Berkshire Hathaway Inc. has only limited exposure to currency fluctuations, mainly through investments in businesses such as reinsurers and marketable securities.

Speaking at Berkshire's annual shareholders meeting on Saturday in Omaha, Neb., Buffett said the company has a large share of its fortunes tied to the euro, largely from investments in European companies.

Unlike other prominent investors like hedge fund manager George Soros, Buffett has steered clear of large currency bets in recent years, and has said that while he looks worldwide for investments, he would be happy making investment bets mainly in the United States.

However, after many central banks worldwide drove interest rates to record or near-record lows and funneled trillions of dollars of stimuli into economies worldwide as the 2008 financial crisis set in, Buffett said he sees a chance for inflation to rear its head.

"The prospects for significant inflation have increased, not only here but around the world," Buffett told roughly 40,000 shareholders at the meeting. "Weaning ourselves from the medicine" may be more difficult than enacting the stimuli in the first place, he said.

Buffett said the days of very low interest rates in the United States cannot continue indefinitely.

"It won't work forever to run huge budget deficits and easy money," Buffett warned. He said if this causes problems, Congress rather than the Federal Reserve should get the blame.

Buffett's said Berkshire's manufacturing businesses, including the conglomerate Marmon Holdings Inc. and toolmaker Iscar Metalworking Cos., are benefiting from "pretty significant improvement.

He said luxury goods units including Borsheim's and the NetJets Inc. plane leasing unit are seeing improved business, albeit from a "very, very low level," while results for housing-sensitive businesses such as Acme Brick Co. and the insulation maker Johns Manville remain "very poor."

Yet Buffett cautioned policymakers not to artificially stimulate housing sales and perhaps derail a recovery.

"What would bother me is if we were to overstimulate them, and create a permanent overhang," he said. "I want to have a sustainable recovery, and I don't think you're going to have to wait more than a year for that."

Buffett maintained enthusiasm for Federal Reserve Chairman Ben Bernanke, saying "there's no one in the United States that I know of whom I would rather have running the Fed than Ben Bernanke."

He also said low rates make it tough for individual investors. Buffett joked that if an investor held investments when Christopher Columbus arrived in America in 1492, "you might have doubled your money by now."

Buffett said Berkshire has substantial exposure to the euro through investments in reinsurance companies in Germany, such as Cologne Re.

"We seldom develop a strong view on one currency versus another," Buffett said. "Events in past years would make me more bearish in terms of currencies holding their value over time."

Buffett and Berkshire Vice Chairman Charlie Munger said Greece's current financial problems pose a unique challenge because the country's government is a sovereign state, but its fiscal problems prevent it from printing its own money to resolve its economic crisis.

"We may be seeing a test case play out here with a country not using its own currency," Buffett said.

Debt problems in Europe have caused the euro's value to fall to $1.33 as of Friday, from about $1.432 at year end.

Berkshire once had a $21 billion bet against the dollar, but unwound most of that bet three years ago.

Known for his simple language and homespun humor, Buffett likened the crisis to a movie with a depressing ending.

"It will be high drama," he said. "I really don't know how this movie ends, and I try not to go to movies like that."

European governments and the International Monetary Fund on Sunday committed to pull Greece back from the brink of default, agreeing on 110 billion euros ($145 billion) in emergency loans on the condition Athens make painful budget cuts and tax increases.

The rescue is aimed at keeping Greece from defaulting on its debts and preventing its financial crisis from infecting other indebted countries just as Europe is struggling out of recession.

© 2014 Thomson/Reuters. All rights reserved.

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