Warren Buffett’s reputation has taken a bit of a knock lately as results for his investment vehicle Berkshire Hathaway have been released showing a 9.6% fall in book value ” the metric Berkshire often uses to measure performance. Berkshire shares fell 32% last year and 19% this year only slightly better than the Dow Jones Industrial Average. However a one year blip does not change the fact Buffett is widely acknowledged as the world’s most successful long term investor. So it is not surprising that his comments at the annual shareholders meeting in Omaha, Nebraska, have been widely reported. Many of the words of wisdom dispensed by him and his long time cohort Charlie Munger were focused on the performance of the various businesses in the Berkshire fold but its his comments on inflation that most interest us here, not least of which because Buffett has a well earned reputation for accurately reading the long game.
He specifically said, “It’s wrong for politicians and others to keep saying they’re using (US) taxpayers money. My taxes haven’t gone up and neither have yours. What we are doing is borrowing from the rest of the world and building up Government debt. The classic way of reducing the impact and cost of foreign debt is by reducing the value of the dollars you’re going to repay them with.” His conclusion is in the early part of the next decade the dollar will start a prolonged fall and inflation will rise. In real terms, it’s the easiest way for politicians to reduce or pay down the debt.
In a move apparently unconnected with Berkshire, AGM Venezuela’s Finance Ministry has passed a resolution that requires 70% of all gold production be first offered to the Central Bank before it can be allowed for export. In a separate article we recently wrote about China’s steady increase in gold holdings over the last few years and we have commented frequently on their purchase of a range of metal commodities most notably some 750,000 tons of copper in the last few months.
So what have these issues got in common – inflation and the value of the dollar? Central banks, particularly in emerging markets reliant on the value of the US dollar are positioning themselves to mitigate the risks of a dollar fall as a result of a rise in inflation. As Buffett says, “Anybody who holds (US) dollar obligations from outside this country is going to get back less in purchasing power in the future As you would imagine, Buffett has some words for investors keen to position themselves for an inflationary period. But the vast majority will only hear the headline and be drawn to traditional inflation hedges – commodities, particularly metals and oil. Buffett is not alone in expecting the world in general and the US in particular to enter an inflationary period in 2010-11. Traditionally inflation has meant metals prices go up, as the US dollar goes down. The result of these trillions being pumped into the world economy will at some stage be inflation, the question is just when.