From the Wall Street Journal yesterday:
“In the early 1920s, John Maynard Keynes attempted to apply his economic views to speculation in the foreign-exchange markets. Though Mr. Keynes was nearly bankrupted by this experience, he learned a valuable lesson: It is difficult to earn money in forex markets from taking positions based on fundamental economic analysis. Recent losses from shorting the dollar suggest Warren Buffett is receiving a similar lesson. For several years, the Berkshire Hathaway boss has been bearish on the greenback. His views on the subject are quite conventional: he believes that the growing trade deficit and rising foreign claims on dollar assets are bad news for the world’s reserve currency. Since 2002, Mr. Buffett has taken a massive bet, exceeding $20 billion at times, against the dollar. As the buck declined in recent years, this position proved profitable, earning more than $2 billion. This year the bet turned sour. Berkshire Hathaway has lost nearly $900 million from its foreign-currency forward contracts in the first nine months. Mr. Buffett reduced his dollar short position by $5 billion in recent months. He should get out of the position entirely. Mr. Buffett has no competitive advantage in the currency business. Like the chastened Mr. Keynes, Mr. Buffett used to eschew making investments based on macroeconomic forecasts. He had no special insights into these trends, Mr. Buffett used to say. Moreover, no market is trickier to play on macro views than currencies, which are influenced by a vast number of factors. This year the dollar has strengthened for myriad reasons: rising U.S. interest rates, U.S. corporations’ repatriation of foreign profits, strong economic growth, and so forth. Mr. Buffett didn’t anticipate these factors and got burnt. Forex is a trading, not a buy-and-hold, game. Yet Mr. Buffett is no trader. He takes positions and holds them. While Mr. Buffett’s bet can be seen as a partial hedge against Berkshire Hathaway’s huge cash and dollar bond investments, it is also a speculation that the world’s best-known investor has neither the training nor the aptitude to take.”
Simon Nixon, Mike Verdin and Edward Chancellor
