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Warren Buffett's Anti-inflation Strategy

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Monday, 16 Nov 2009 03:51 PM Current | Bio | Archive

Warren Buffett’s recent acquisition of Burlington Northern for an estimated $26.4 billion is another cagey move by the country’s greatest investor.

After announcing the deal, Buffett couched his old-fashioned railroad play as American as apple pie.

“It’s an all-in wager on the economic future of the United States,” Buffet said. “I love these bets.”

But what Buffett didn’t say is that the Burlington deal is a rather clever play against inflation.

Make no mistake about it, Buffett is very worried about inflation.

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In some candid comments earlier this year, he warned that inflation will undoubtedly rear its ugly head.

At his annual shareholders meeting in May, Buffett said of U.S. economic policies: "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."

Later in the year, in August, he added gasoline to the fire by writing an op-ed for The New York Times warning of the inflation threat.

“Unchecked carbon emissions will likely cause icebergs to melt,” Buffett wrote. “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

He then noted the “enormous dosages of monetary medicine continue to be administered” and suggested that if we are not careful the United States could “evolve into the banana-republic economy described by Keynes.”

With so much worry about the United States, why buy a U.S.-centric, fuddy-duddy company like Burlington Northern with almost 100 percent of its business in the U.S. (it transports in Canada as well), and with its most significant freight being very “un-green” coal?

Well, clearly Warren has several good reasons.

Key among them is the fact that an investment in most asset classes, including equities, will be far better than investing in dollars.

Marc Faber, the gloom and doom-meister, has laid out the scenario: Investors wake up one morning and realize every asset class is a better place to hold their wealth than dollars. Soon there is a stampede out of dollars and into everything else. Currencies, gold, equities, even real estate could rise, Faber posits.

Buffett is leading the stampede away from dollars.

The Burlington deal is set to cost Buffett $26.3 billion in cash and stock. As of June 30, 2009 Buffett’s company, Berkshire Hathaway, had $24.5 billion in cash on hand.

Once the king of cash, Buffett is now willing to forego a significant portion of his stockpile to buy equities. This is a major reversal from years past and it should not be lost on investors who like to mimic the Sage of Omaha.

Buffett won’t use up all of $20 billion-plus of cash on hand. The Burlington deal will claim about $8 billion from Berkshire’s coffers.

Even if Buffett wanted to use more of his own cash, he can’t. Because several Berkshire units are major insurers, he needs to keep huge cash reserves on hand — the “float” that is used to pay out claims, if necessary.

And, apparently, some think Buffett is not keeping enough of a cash cushion.

Both Fitch and Standard & Poor’s have announced they may downgrade Berkshire’s bond ratings (the company now has a AAA-rating from Standard & Poor’s), citing, among other concerns, the reduction of cash reserves in the holding company.

Buffett brushed off the threat of a bond-rating decline. He knows Berkshire is better off owning something, anything over simply cash.

In fact, as part of the Burlington deal he also is going against another one of his investment dictums. He’s going into debt — a mammoth $8 billion worth of debt.

Typically, debt is a bad thing. Buffett has spent his whole investment career railing against debt. But he also knows that during inflationary times debt can be wonderful for those who borrow money at low, fixed rates.

This is especially true if you have a business like Burlington that can easily raise its rates. Buffett will be paying back his lenders with dollars worth less than the level at which he borrowed them. Meanwhile, cheap, long-term debt has helped him buy an asset with which he can easily increase, or inflate, prices.

Undoubtedly, Buffett is implementing an inflation-protection strategy. Shortly before his Burlington deal, Buffett significantly upped his stake in foreign government bond holdings through his insurance units, raising his investments in this type of investment to a reported $11.1 billion from $9.6 billion as of June 30, 2009.

Now, that can’t be described as a bet on the future U.S. economy. Like the Burlington Northern deal, it is instead “all-in wager” on the prospect of rising inflation in the United States.

Sean Hyman Recently Revealed His Currency Trading Secrets. Click Here to read the full report!

 

 

 

 

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RuddyMN
Warren Buffett s recent acquisition of Burlington Northern for an estimated $26.4 billion is another cagey move by the country s greatest investor.After announcing the deal, Buffett couched his old-fashioned railroad play as American as apple pie. It s an all-in wager on...
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2009-51-16
Monday, 16 Nov 2009 03:51 PM
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