A recent interview (February 07, 2008) with the Financial Post, Warren Buffett, chairman of Berkshire Hathaway Inc., answered questions from some of Bay Street's top investor relations professionals. He shared more on his views on the markets, politics and the economy.
Q: What are your views on the credit crunch?
Warren Buffett: Credit has been repriced, but it has not become unavailable. There is repricing of risk and an unavailability of what I might call "dumb money," of which there was plenty around a year ago.
We first noted it big in the mortgage field. You had a situation a couple of years ago where virtually every American believed that house prices would do nothing but go up. If you've got every American believing that about any asset class, they're going to get more and more enthused about it, and borrow more and more money against it. And the lenders believed it, as well. And then you had Wall Street repackaging mortgages into unfathomable instruments that people bought to get a little bit extra yield, and now we are finding out what they own.
You've had the same thing in corporate finance, in what used to be called "LBOs," but has taken on a name with somewhat less stigma, "private equity." All of a sudden, the mortgage thing is starting to spread to some pretty big institutions.
I've said in the past, it's only when the tide goes out you see who is swimming naked. Well, the tide is now out, and it's not been a pretty sight.
Q: You made a bet against the U.S. currency. The dollar's come down substantially. Where do you see it going now?
Warren Buffett: At Berkshire, at the peak we had about US$22-billion of foreign-currency positions -- some of it was in the Canadian dollar, and I want to thank everybody here. There's no royalty though.
We have tried to emphasize businesses with earnings in other currencies --Coca-Cola, for example. That, to me, would be a superior way to bet on other currencies.
The only currency we hold now is the Brazilian real. If you grew up like I did, then having a holding in Brazilian currency you would have been committed someplace. In the last 100 years, five Brazilian currencies have gone to confetti. Wealthy people in a country like that would often stash their currency in another country like Switzerland or some place like that.
In the last five years the Brazilian real has doubled in value against the U.S. dollar, so if you were a Brazilian and you put your money in the American dollar, you lost half your net worth in your home country. And the outstanding thing about that is that during much of that period the Brazilian central bank was supporting the U.S. dollar.
Insanity consists of doing the same thing over and over again and expecting the same result. In the United States the cause, in my view, of the declining dollar is the current-account deficit, and the trade deficit being the biggest part of that.
We still, in the United States, are force-feeding about S$2-billion to the rest of the world. People will become a little reluctant over time to continue holding dollar-denominated assets. In the future, I would predict that the U.S. dollar will decline. I don't know what it will look like in the short term, but force-feeding the rest of the world US$2-billion a day is inconsistent with a stable dollar.
Q: It seems like short-term borrowing costs are almost nil. What's your view on inflation and whether the Fed is doing the right thing?
Warren Buffett: The fed has to balance a couple of things.
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