Warren Buffett is bearish on the United States, and he’s bullish on Europe. For the first time in his life, starting in 2002, Mr. Buffett entered the foreign exchange markets and shorted the dollar. This rare macro-economic bet was based on a belief that U.S. consumers and the U.S. government were spending beyond their means, and that the trade deficit was a sign of economic weakness.
While his short position was profitable in 2004, he has lost more than half a billion dollars so far in 2005. Some Wall Street sources suggest that his breakeven exchange rate is $1.22/euro, so with the euro trading near $1.21 in mid-June, his short position was seriously in the red.
Buffett’s anti-American investment sentiment has cost Berkshire Hathaway shareholders dearly. During the 12 months ending in mid-June, his stock price was down roughly 7 percent, while the S&P 500 was up 5 percent. The stock market voted “non” on this Berkshire investment strategy, just like the French and Dutch voted against the European constitution.
And, of course, these two developments are inextricably linked. The French voted against the constitution because they are afraid it will force them to give up their 35-hour workweek and generous social welfare system. This system forces French taxpayers to support an unemployed contingent that has reached 10 percent of the labor force.
It’s hard to figure out why Warren Buffett is so down on the U.S. economy and so enthusiastic about Europe’s. But gloom and doom forecasts about the U.S. economy are a dime-a-dozen these days. It’s as if we rolled back the clock 20 years and it’s the early 1980s all over again.
Then, it was President Reagan’s tough stance against Communism, large budget deficits, growing trade deficits, Germany, and Japan that were bothering so many pundits. Today, it is President Bush’s tough stance against terrorism, trade and budget deficits, China, and India that stir fear in the hearts of the doomsters.
The gloom and doom of the early 1980s proved to be nonsense, just as the current pessimism will prove wrong as well. Corporate profits have climbed to an all-time record high, the U.S. stock market is more undervalued than it has ever been, and the unemployment rate has fallen back to 5.1 percent.
Incidentally, back in 2003, Andy Kessler of Tech Central Station had an interesting look at Buffett with the serene title of “Warren Buffett Hates Your Guts“.