Buffett bets $21.4 bln against the US dollar

Buffett bets $21.4 bln against the US dollar Sun March 6, 2005 10:24 AM GMT+02:00

By Jonathan Stempel

NEW YORK (Reuters) - Warren Buffett, the world's second-richest person, last year increased his bet against the U.S. dollar 78 percent to $21.4 billion, resulting in a $1.84 billion gain.

He also said he would be happy if his bet were to fail.

In his annual letter to shareholders of his Berkshire Hathaway Inc. holding company, the 74-year-old said Berkshire held $21.4 billion of foreign currency contracts spread among 12 currencies. A year earlier, Berkshire had $12 billion of contracts over five currencies.

Buffett is concerned that U.S. policies are causing trade and budget deficits to spiral higher and might cause non-U.S. investors to pull money out of the country. This, he said, will put downward pressure on the dollar, which already trades near lifetime or multi-year lows against several major currencies.

Last year, the U.S. trade deficit rose 24 percent to a record $617.7 billion.

"The evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come," Buffett said. "As W.C. Fields once said when asked for a handout: 'Sorry, son, all my money's tied up in currency.'"

Most of Omaha, Nebraska-based Berkshire's portfolio in U.S. buttets, but Buffett is hedging that exposure with the currency contracts.

Last year, that hedging was profitable. Berkshire reported a $1.84 billion pre-tax investment gain on the contracts, up from $825 million a year earlier. The gain was $1.63 billion in the fourth quarter alone.

"Unlike other investors, who pile into foreign stocks, Buffett is sticking with U.S. buttets and hedging the currencies itself," said James Armstrong, president of Henry H. Armstrong buttociates in Pittsburgh, which invests 18 percent of its $450 million of buttets in Berkshire shares.

"Most investors are traders, even more so in currencies," he added. "Buffett is thinking in terms of decades."

BIG BET

Buffett said he never traded in currencies before March 2002. The greenback bought 36 percent fewer euros and 23 percent fewer Japanese yen on December 31, 2004, the end of Berkshire's last fiscal year, that it did on March 31, 2002.

While saying the currency contracts in no way reflect doubts about America, Buffett faulted policymakers for leaning toward a "not-so-benign" neglect toward the trade deficit.

"Policymakers continue to hope for a 'soft landing,' meanwhile counselling other countries to stimulate (read 'inflate') their economies and Americans to save more," Buffett said. "These admonitions miss the mark."

He said the United States suffers from "deep-rooted structural problems" that will cause deficits to balloon unless trade policies are overhauled, perhaps through a new tariff plan, or a falling dollar unsettles financial markets.

Buffett said a prompt solution, which he wants, would likely cause currency losses for Berkshire. This, however, might be offset by the benefits of a strong dollar and low inflation to the company's big stake in dollar-based buttets.

Berkshire said the fair value of its currency contracts was $1.76 billion at year end. This would rise to $6.67 billion if the dollar immediately and uniformly fell another 20 percent, but would decline to a negative $2.61 billion if the dollar rose 20 percent, the company said.

This is a large bet, but not an excessive one, said Keith Trauner, a portfolio manager at Fairholme Capital Management in Short Hills, New Jersey, which invests more than 20 percent of its $1.4 billion of buttets in Berkshire.

"It certainly in no way can be characterized as betting the company," he said. "I have no idea whether Buffett is right or wrong. But I wouldn't want to be in the regular habit of taking the other side of one of his bets."