How Warren Buffett Is Smarter than the G20 23 comments
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By Simon Johnson
The G20 Finance Ministers and Central Bank governors are meeting today in St. Andrews, talking about the data they will need to look at in order to monitor each other’s economic performance and sustain growth (seriously).
The underlying idea is that if you talk long enough about the US current account deficit and the Chinese surplus, stuff happens and the imbalances will take care of themselves – or move on to take another form.
Warren Buffett seems to agree.
Buffett’s big investment in railroads looks like a shrewd way to bet on growth in emerging markets – which is where most incremental demand for US raw materials and grain comes from. It’s also a polite way to bet against the dollar or, even more politely, on an appreciation of the renminbi.
When China finally gives way to market pressure and appreciates 20-30 percent, their commodity purchases will go through the roof. You can add more land, improve yields, or change the crop mix of choice (as relative prices move), but it all has to run through Mr. Buffett’s railroad.
Of course, Buffett is nicely hedged against dollar inflation – this would likely feed into higher inflation around the world, and commodities will also become more appealing.
And Mr. Buffett is really betting against the more technology intensive, labor intensive, and industrial based part of our economy. If that were to do well, the dollar would strengthen and resources would be pulled out of the commodity sector – the more “modern” part of our production is not now commodity-intensive.
The G20 will stand pat, waiting for the recovery and hoping for the best; “peer review” will turn out to be meaningless. But this raises three dangers.
- China will overheat, with capital inflows fuelling a giant credit boom. Books with titles like “China as Number One” and “The China That Can Say No” will appear. The boom-bust cycle will resemble that of Japan in the 1980s – you don’t need a current account deficit in order to experience a costly asset price bubble. Other emerging markets may follow a similar pattern (think India, Brazil, Russia.)
- US and European banks will be drawn into lending to China and other emerging markets, directly or indirectly. In a sense this would be a re-run of the build-up of debt in Latin America and Eastern Europe in the 1970s, leading to the debt crisis of 1982 (remember Poland, Chile, Mexico). Banks with implicit government guarantees will lead the way.
- We hollow out the middle of the global economy – with a few people doing ever better and most people struggling to raise their living standards. Increasing commodity prices hit hard at poorer people everywhere (recall the effects of the relatively mild run-up in food and energy prices in the first half of 2008). Global volatility of this nature helps big business but at the cost of undermining the middle class.
By betting on commodities, Mr. Buffett is essentially taking an “oligarch-proof” stance. Powerful groups may rise to greater power around the world, fighting for control of raw materials and driving up their prices further. As long as there is growth somewhere in emerging markets, on some basis, Mr. Buffett will do fine.
As for the G20, they are already a long way behind the curve.
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This article has 23 comments:
Only, in Japan the people themselves are solvent. I would say US deleveraging will outlast Buffett's days on this earth. I hope I am wrong.
But they just passed the TRILLION Dollar Health Care Reform; fat chance this Government Administration (which is supported by Buffett) is in any deficit reduction, controlled spending mode.
I grew up reading of countries prospering because they were out-competitive in finished goods, not raw materials. I learned how America's freedom from the yoke of tyrants allowed the spark of inspiration to fan into flames of new and innovative industries where none had existed before.
Now we have control by oligarchs and the nanny state. We are descending into the third world. The middle class, as the article mentions, is reduced to fighting against reduced living standards, that have gone on for decades now. Our leaders are squandering everything on preserving the status quo for the oligarchs and bloated government. Only the middle class has to tighten it's belt as credit dries up.
Buffet is hedged against the strong possibility that there aren't enough Americans aware, awake and motivated enough this time to awaken to the desperately-needed change of course.
So gasoline is down a little from last year but it is way up compared to 3 years ago. Gold is at an all time high and commodities keep going up. We all know where health care is headed.
The only thing I know that has deflated is my weight and it is only down 1%...lol
What are you proponents of deflation smoking?
He's betting oil prices will rise significantly, but people will still need transportation of people, food and goods. The most energy-efficient and cost-efficient way to move almost anything around is still rail.
Railroads are more than transportation. He's bought easements, and land - *lots* of land. If he was to cover every square inch of railroad land with solar panels wherever it made sense, he could run his trains on electricity and sell the excess back to the utilities.
It's a move to real value, away from fragile abstract asset classes like derivatives, CDOs, etc. whose value will shrink (possibly to zero), to needed physical assets.
Common sense plus genius. Pure Buffet.
However, the author is right that the G20 has multiple screws loose. They are one of the most ineffective groups ever assembled. Furthermore, none of them can ever say no or back away from doing things to give each of their economies short term perks. Thus central bankers around the world always make the economic marital vows, "We will depreciate and debase during good times or bad, in economic sickness or health, until revolution or death do we depart."
On Nov 08 03:48 AM Gary A wrote:
> I still think deflation is a big threat, in which case Buffett's
> railroads will remain empty and the United States will be Japan.
>
>
> Only, in Japan the people themselves are solvent. I would say US
> deleveraging will outlast Buffett's days on this earth. I hope I
> am wrong.
Buffet may die tomorrow but that is not the point. His investing horizons are all years down the road
"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless." - Thomas Jefferson
Things are happening today in reverse order of the way they did in Jefferson's time. Study monetary history and you will see our country was formed in response to times like these.
On Nov 08 03:48 AM Gary A wrote:
> I still think deflation is a big threat, in which case Buffett's
> railroads will remain empty and the United States will be Japan.
>
>
> Only, in Japan the people themselves are solvent. I would say US
> deleveraging will outlast Buffett's days on this earth. I hope I
> am wrong.
on railroad is the following logic:
The future world will be MultiPolar.
these Poles include China, US, and Europe common market.
Commodities, not currencies will be king.
THE BNSF railroad LINKS cheaply, CHINA with EUROPE in a multimodal transport link. NEAT.
On Nov 08 08:36 AM lalsai wrote:
> I agree that emerging markets will do better; but how does investing
> in BNSF co-relate to investing in emerging market railroads etc.
> BRK will benefit from all the different investments --- but BNSF
> is only good if the US recovers ---- which may be a long time coming.
> The only way the US improves fast is: 1) Constrictional control in
> Government spending (excluding Social Security, Medicare, Defense)
> 2) 15% & 25% Flat Income Tax 3) No more expansion of Government
> Programs.
> But they just passed the TRILLION Dollar Health Care Reform; fat
> chance this Government Administration (which is supported by Buffett)
> is in any deficit reduction, controlled spending mode.
There just isn't enough of every thing for everyone. There never was & never will be. We always want more. When we stop & realize that all of the material things we seek won't give us the piece of mind we want maybe we will relax & enjoy just living.
Now it is important that we make things & do things. But do we have to pay so much just to buy air? (People pay to have designer clothes but how much increased value do you really get. The same with lots of things we buy)
Why is it so important that we pay so much to reward people who put up money? They just suck so much out of the system that they kill the goose that lays the golden eggs for them (The general population) Credit card companies charge on each sale & then get interest, which is fine as long as they charge a fair rate. When the rates & cost become to much they have taken the money out of the system & people don't have the money to buy the things to keep the eggs coming or to pay people to make more.
So what do they do? They go to the government to put the money back in. Then what did they do? They use the money to play the money game while not seeing that the money to loan would flow to the little man. Then the little man has no money to pay taxes to pay for the money given to the lenders, but the lenders don't want to pay taxes, so we will just print more money that won't have any real value.
So while a few want & get more, they kill the goose that they want to lay the golden egg.
Money is needed, but it must flow through the system smoothly at all levels.When it does things are good & when it don't things are not good.
What each of us do impacts others in ways that may not make for a better system. Getting more for our self may not help us much if we take to much of the pie & leave others out of the main stream,
who then do things that aren't good for the system. They just don't be come good citizens.
It's all great & good for you if you are one of few that have in a world of most who are have nots. Or is it?
"Gasoline" requires (believe me on this) teams of seismologists, electrical engineers to do digital signal processing of the echo signal. geologists to interpret the results, test rigs and wells to confirm data in statistically meaningful way. Followed by production of oil. Its bulk transport to a refinery. At the refinery (which u can NEVER really TURN OFF), the oil is filtered from the accompanying crud, heated, volatile pollutants removed. Additives are put into the car fuel. it is transported to a retail networks underground tank which must comply with (weak) EPA standards. then pumped into your tank using standardized callibrated dispensing nozzles. And u pay $4/gallon.
MILK is a crime. Bloated Americans can't afford their own labor anymore. Here in NYC buses run at a crawling pace because people have to QUEUE UP inside the entrance at the front of the bus to pay fare.(!) WHAT A JOKE. In a 15Trillion economy we can't hire a "ticket collector" for each bus, to roam inside and collect fare whilst seating people quickly as they board. I swear, once over a distance of 2 miles, I walked at even pace parallel to a bus route, and kept pace with the same bus. WHAT A JOKE.
On Nov 08 10:18 AM rennert wrote:
> 88% of Americans are working. Everyone on my street goes to work
> every day. What is this article supposed to show?? That we have a
> reason to keep interest rates on Zero and debase our currency to
> keep Wallstreets coffer filled. Don't drink the KoolAid. Unemployment
> and deflation taks and scares are the new KoolAid. They are trying
> to distract us from the real thing. That they are feeding Banks and
> Wallstreet cheap money hand over fist while many Americans do not
> get enough return on their savings to feed their family's. And now
> they are trying to justify it with these scare stories . Milk at
> $8.50 a gallon and rising. 88% of people are working. Vote for the
> man that has the back bone to defend our money and raises rates by
> at least 1-2%. Look to vote for the person that defends our notional
> security from Vultures.
Do you want to invest in cars or the car pool?
On Nov 08 03:48 AM Gary A wrote:
> I still think deflation is a big threat, in which case Buffett's
> railroads will remain empty and the United States will be Japan.
>
>
> Only, in Japan the people themselves are solvent. I would say US
> deleveraging will outlast Buffett's days on this earth. I hope I
> am wrong.
For instance, Canadian National Railway is another railroad that has a strong network based in commodity producing areas with strategically located ports. Their network has hubs at Chicago, Toronto, and Edmonton with rail lines going through the main agricultural and energy-rich areas of North America. Their network includes ports at New Orleans and Mobile which face the Panama Canal and the Latin American market, Halifax which faces the European market, and Vancouver and Prince Rupert which face the Pacific Rim and East Asian markets.
Rail road assets are the best including steel scrap in case of demolition.
Buffet is the only survive of the old school of financiers.
giulionegrini.com
I think unemployment is overrrated if 70% of our GDP is consumer driven and 25% of the peopel have over 90% of the assets then the stock market should fine with all this excess liquidity and spending should resume.
"
That's the problem, if your figures that 25% have 90%+ of the assets. That is what brought about the crisis of capitalism, a crisis of overproduction. Quite simply, wealth became, once again, too concentrated, as it did in the 1920's, and the velocity of money collapsed... Which directly lead to the still unfolding, in my opinion, Greater Depression.
But, since the USA mainstream media is controlled by seven men (oligarchs) all you hear is Greater Recession.... If you believe that than you will also believe the unemployment rate is really 10.2% nationally, that recent GDP of 3.5% means "recession over", and that we have two political parties with FUNDAMENTAL differences acting completely on behalf of the American masses.
Ok, I think I made the point although much more can be written about the contradictions of American Capitalism and its "democracy", the best that money can buy. Which is to say, those with the most money get the most democracy.
By the way, another very interesting article by the author.
"
We hollow out the middle of the global economy – with a few people doing ever better and most people struggling to raise their living standards. Increasing commodity prices hit hard at poorer people everywhere (recall the effects of the relatively mild run-up in food and energy prices in the first half of 2008). Global volatility of this nature helps big business but at the cost of undermining the middle class.
"
From the quote it looks like the propaganda machine of the financial oligarchy will have a hard time selling capitalism as the best economic system for the masses. I mean, when the masses come to accept that they are out of a job, out of the means to feed/clothe their families simply because there is no profit in it for the capitalist elites, well, I'm sure readers can put 2+2 together on that one.