Balanced View: Intelligent Discussion of Market Trends

Not every one is peddling a doomsday scenario, an interesting view perhaps.

How Buffett tripped over the dollar.

The greenback's big rally against other currencies has proved Warren Buffett -- and other dollar bears -- wrong. Here's what Buffett missed.

By Jon D. Markman. MSM

Six months ago, the value of the U.S. dollar was on the firing line as it plunged to a record low vs. the euro. Amid fears that a united Europe would surmount the spendthrift United States as a safe haven for financial assets in a tumultuous world, investors worldwide -- led by noted Nebraska sourpuss Warren Buffett -- heaped scorn on our currency and scolded U.S. lawmakers to get the federal deficit under control.

But a funny thing happened to all those dollar bears. Their contempt for U.S. economic freedoms hasn’t amounted to a hill of bill of beans, and their positions have been smoked. The dollar has rallied massively since the start of the year against all other currencies, reflecting a swift, stunning paradigm shift in the way that global political risks are priced.

Buffet, who reportedly lifted his bet against the buck to a position of $22 billion and counting in the first quarter this year, isn’t sounding quite so smug anymore. Normally an equity investor with liberal social views who rarely made forays into the foreign exchange markets, he has had his head handed to him by more experienced currency players. Although his anti-dollar attack worked from 2002 through 2004, since then he has been forced to pay for attempting to mix politics and money.

Berkshire investors suffer
An uncharacteristic earnings growth setback at his Berkshire Hathaway (BRK.A, news, msgs) conglomerate in the first quarter was attributed to this wrong-way wager against the greenback in favor of other currencies -- including the euro, Swiss franc, Australian dollar and British pound. The second quarter is concluding with an even worse tone for the position. It’s not fair to assume that the dollar’s rally will continue, but it has shown typical American scrappiness in its comeback against doomsayers and ill-wishers. See the news
that affects your stocks.

Is Buffett likely to be proven right anytime soon, or will his investors continue to suffer from his bearish posture toward the buck? It all depends on your view of the relative strength of U.S. and European economic policies and political structures.

Buffett has told shareholders that he took his original position based on a belief that Bush policies had led to unsustainable twin deficits in the federal budget and the balance of our trade with the world. But guess what? Due to improved tax collection, higher payroll earnings, a modest decline in overall government spending and better-than-expected corporate earnings, estimates of the U.S. budget deficit are steadily on the decline. The 12-month federal deficit has narrowed to $339 billion, or 2.8% of GDP, according to Ned Davis Research. Receipts have been growing twice as fast as spending over the past 12 months, as both corporate and individual tax contributions have been stronger than estimated.

Although the cutback in spending presents our economy with a fiscal drag, the result has been a positive reassessment of Americans’ focus on getting their house in order.

Good news grows
This week, more uplifting economic news appears to be in store. Economists at ISI Group report that their proprietary weekly survey of corporate results in key sectors are trending much higher than they expected, with particular strength from retailers, restaurants and car dealers. Auto production is much higher on the heels of new incentive programs, and consumer confidence has reversed its decline and is now trending up.