Riddle: What Currency Is Warren Buffett Buying?

The Sage is at it again, betting on currencies. I've read a couple of articles recently regarding this. In his words at the annual meeting: "I'll let you know next year" as to which currency he picked up. The only thing we could really ascertain was that it was only one currency that he picked up.

So, if you were him, what would you buy?

Let's look at the evidence. What is the investment guru's mantra when it comes to purchasing a company? Warren Buffett likes to buy the very best at a huge discount. And... he's patient. There's something else that Buffett looks for in his investments that is crucial: He only bets on a sure thing.

Taking those criteria, what are some of the currencies that Buffett would be interested in? Well, the currency would have to be undervalued and a great long-term value. Looking for a currency that is grossly undervalued, we can go ahead and eliminate everything but the Japanese yen and the good ol' greenback. All other currencies are at their all-time highs, so that would mean too pricey for the Sage.

So which one of these currencies is Buffett likely to purchase and why?

Japanese ¥en:
Certainly the fundamentals are there for the yen. It's at a rock bottom since what feels like eternity. But, the one thing that is most likely to push the yen higher over the longer run is interest rates, not necessarily growth. Buffett would have to believe that interest rates in Japan were going to go higher, and that the carry would unwind. That's a possibility, especially since the BoJ Fukui has been bantering all day long that he's going to be raising rates. But, after 17 years of being in the depths of despair, I don't see this as a sure thing. Buffett likes sure things, and he likes lots of upside. Against the USD, the yen will likely only appreciate about 10 full yen. Not a ton. There are other carry currencies that could get unwound and see bigger moves. But, I don't think Buffett would venture too far into the realm of sophistication with regards to his currency trades. He likes things simple. Playing a potential carry trade unwind is not enough of a sure thing for Buffett, and the upside isn't high enough.

The U.S. dollar:
Across the board, the USD has seen better days. But, the Sage just bet against the greenback not long ago. Would he seriously be considering a reversal of fortune already? And, is there enough fundamental analysis to push this currency higher across the board? I don't think so. The same reasons that the U.S. dollar fell back in 2001 are still lingureing today, save for higher interest rates. The trade deficit is still around, and so is government spending. However, U.S. companies are seeing a ton of profits coming from overseas from the cheaper dollar. Interesting. In fact, that might be the one saving grace for the U.S. dollar, and certainly one of the reasons that the U.S. equity markets keep pushing higher. But, I'd be reluctant to believe that Buffett has changed his mind on the greenback.

But... there's something else:

Of all of the articles that I read, the dollar and yen were the two obvious currencies that everyone pointed out. But... there's still one more: The Chinese yuan. I like this currency in the long run. It's at an artificial low against everything, and climbing. Plus, the upside of the economy is huge. Much bigger potential here than in the U.S.

So, if Buffett were to have purchased Chinese yuan, then he'd be in a great position to purchase a few companies. He's likely to see a 50% increase in his currency appreciation over the course of a few years. Plus, he's also likely to see some decent appreciation to any companies he would purchase with the strong economy over there. Buffett has already purchased big stakes in at least one Chinese company, PetrolChina (PTR). So, we know he's open to the idea.

Not sure why most of the articles I read missed the Chinese yuan as a potential purchase for the Oracle of Omaha. But there it is plain as day.

Perhaps we should all take a look at purchasing a few yuan for the long haul as well.

Comments

[Frank Li]

Very convincing, particularly given the constant US pressure on China to revalue the Yuan. And buying Yuan has the advantage that there's less political and company specific risk than buying individual stocks or firms. Pity there's no Yuan ETF yet.

[Frank Li]

Note also that buying currencies is a negative comment by Buffett on stock market valuations. If he's happy to get the interest rate plus the currency appreciation instead of the risk of buying individual stocks, that says a lot about the market.

[ottorock]

my best guess too. even if warren isn't buying the Yuan, there's plenty of reasons for others to jump on

[Lei Yang]

But how would he actually buy the currency? RMB's not free trading and I highly doubt WB will do anything illegal. Only thing I can think of is QFII but I have never heard any extraordenary allowences from the Chinese government.

[MichaelBommarito]

Write yuan futures for guaranteed delivery in the future. If you expect the yuan to appreciate, you make any profit above the agreed upon rate.

[Annon Hong]

Sorry that I am new to this currency thing. I am a little confused. US imports from China much more than it exports to China. Why would US want Yuan to go up? Doesn't that make imported items more expensive/inflated? Unless people expect China to buy more from US if Yuan goes up? That's a lot faith on China's demand for US goods based on currency differentials. If the argument is that only with higher Yuan would US buy less from China, then this isn't really a currency issue to start with right? Because it would just mean that US will be buying less with the same amount of money. I must be missing something. Any enlightening comments are appreciated.

[Frank Li]

That's exactly it -- if the price of imports goes up, the volume of imports should fall and the volume of exports should rise, and the US current account deficit with China and the rest of the world should reach equilibrium. In other words, in the long term prices clear markets. Of course in the short term that's not true and higher import prices actually increase the deficit until consumers adjust their demand.

[Annon Hong]

So I guess what US government really wants is for Yuan to go up high enough so that US can enjoy China's cheap labour. And while doing that, US also makes sure that the expensive made-in-US products sell enough to China to pay for all the cheap stuff. Hmm, I see. Very brilliant plan. People in China makes $200/month vs US $1600/month. People in US only need to work 1 month to buy 8 months of supplies from China. But people in China need to work 8 months to buy 1 month of products from US. But only with this would US call it a fair trade and also keep a straight face.

[jonathan]

Don't confuse "expecting an event to occur" with "making an event occur". The US government has no plan for what happens to the Yuan and is not a monolithic entity anyway. Factions that represent labor interests in the US would like to the the Yuan rise since (their theory) that would slow imports and mean more US jobs. I would prefer to see the Yuan float just since that is the norm for the international system...wherever the Yuan ends up. The US is not China, it has no central authority like the Communist Party, and has no 'plan' to manipulate China's currency. Frankly, most of our bureaucrats can barely put on their pants without help.

That said; there are a lot of very smart and wealthy investors who may see an opportunity in the artificial price that the Yuan currently has and who will seek to place bets accordingly. Many would bet on the Yuan rising if it were floated...thus the expectation. That is not the same as somehow making that change actually happen.

[gokou3]

"But how would he actually buy the currency?"

There's something called NDF (non-deliverable forward) traded in Singapore that allows one to bet on the directions of the Yuan. The carry is about 5%, meaning that the Yuan needs to raise at least 5% in the next year to break even. Not a sure bet, I say.