Buffett Warns: The Dollar Will Decline

Let the word go forth: On Friday, March 25, 2011, Warren Buffett predicted the decline of the U.S. dollar.

In a speech given in New Delhi (where he's hunting up some cheap Indian stocks), the chairman of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) warned investors to avoid "long-term fixed-dollar investments" such as 10-year U.S. Treasury bonds. Buffett worries that the $2.3 trillion in new money our government has pumped into the economy, when combined with interest rates so low they're practically giving money away, are combining to dilute the value of the dollar.

As a result, Buffett warns: "If you ask me if the U.S. Dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not."

What's more, he's matching actions to words. Over the last couple of years, Buffett has been selling off longer-dated bond holdings, shifting assets into cash and shorter-dated paper. Berkshire's holdings of debt dated longer than 10 years dropped 31% over the past 18 months, while Berkshire's cash holdings leapt 56%.

What's it mean to me?
Of course, if you're visiting the Motley Fool, you may not care too much about bonds. By and large, Fools are a stock-focused folk -- but Buffett's musings on the value of a greenback have implications for companies, too.

Consider for a moment what a weak dollar means for companies like Intel (Nasdaq: INTC  ) and Cisco (Nasdaq: CSCO  ) , which sell high-tech goods around the globe. The weaker the dollar gets relative to currencies in other countries where the companies operate, the cheaper their wares start looking to foreign buyers. Plus, when paid in foreign currency, profits earned outside North America buy many more greenbacks once repatriated to U.S. shores -- boosting dollar-denominated profits.

It's also interesting to see what these companies are doing with their cash. Quick! When a company has cash on hand, what does it usually do with it? That's right -- it invests the cash, either in short-term paper (so short that it's often denoted "cash and equivalents"), debt of slightly longer duration ("short term investments"), or in longer-term debt. And if you take a look at their balance sheets, both Intel and Cisco are practicing what Buffett preaches: Intel keeps more than twice as much "cash" on hand ($16.8 billion) as it stores in long-term investments. Cisco has a whopping $40.2 billion of its wealth parked in shortish-term investments -- and just $873 million invested in longer-term securities.

What's an investor to do?
Figuring out where to park a spare $40 billion to keep its value from eroding -- that's a problem a lot of us wouldn't mind having. But fear not, intrepid investor. Buffett believes you're still better off putting money in stocks than in any other investment today. Because "it's very easy to take away the value of fixed-dollar investments," intones the Oracle of Omaha, "I would much rather own businesses."

Why? Well put yourself in the CEO's chair once again. When you see the value of the dollars that you get for your goods shrinking, what do you do? Demand more dollars. Raise prices. Profit from inflation.

Great minds think ... similarly
This echoes comments made by hedge fund guru John Mauldin in his recent book Endgame. You see, whether it takes his projected "5 years, 10 years or 20 years," Buffett believes the U.S. government must ultimately inflate the U.S. dollar in order to reduce its debt burden and increase its exports. For now, the Fed denies having any such intention, but not everyone has such compunctions -- so why wait for the U.S. Why not start investing in companies profiting from inflation today?

As the U.S. dithers on how to simultaneously deal with its debt while performing emergency surgery on a weak economy, Mauldin sees our cousins across the pond embarked upon a full-scale assault on the value of their own currency. As the Bank of England works to cut spending and "inflate away" its debt, Mauldin muses that "the combination of loose monetary policy and tight fiscal policy should be bad for sterling but good for U.K. large-cap stocks."

Don't buy bonds. Buy big British businesses
Taking Buffett's advice, and Mauldin's, to heart, I've run a few numbers on a few of these UK-based businesses for you. Here are just a few opportunities that caught my eye:

Company

P/E Ratio

Projected Growth Rate

Dividend Yield

National Grid (NYSE: NGG  ) 12.4 5% 5.9%
ARM Holdings (Nasdaq: ARMH  ) 85.5 16.8% 0.5%
AstraZeneca (NYSE: AZN  ) 8.3 2.1% 5.5%

Seems to me, the U.K. market offers a little something for everyone. Dividend seekers can happily cash 5.9% dividend checks from National Grid. Growth seekers will thrill to the near-17% hypergrowth at ARM. Bargain hunters will no doubt love the ultra-low P/E at AstraZeneca.

Seriously, folks -- with stocks this good, who needs bonds?

Berkshire Hathaway and Intel are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor choice. National Grid is a Motley Fool Income Investor pick. The Fool has written calls on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. The Fool owns shares of Berkshire Hathaway. Motley Fool Alpha LLC owns shares of Cisco Systems.

Fool contributor Rich Smith owns shares of AstraZeneca. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 28, 2011, at 11:04 AM, buffalonate wrote:

    The fact that you think Arm Holding is a good investment tells me all I need to know. It has a 16.8 growth rate and a p/e ratio of 86. That tells me it is worth 1/5 of the what it currently is priced at. I am guessing you have never read Peter Lynch's books on how to value a company.

  • Report this Comment On March 28, 2011, at 11:55 AM, MrPecuniam wrote:

    So basically you are now just realizing the rise of the price of precious metals and what that basically means for the US Dollar at the moment?

    Before the rapid inflation takes in I advise you to spend a few dollars and buy the books by Peter Lynch as buffalonate so kindly describes.

  • Report this Comment On March 28, 2011, at 2:15 PM, topsecret10 wrote:

    Contrary to what many may think of me here on the Motley Fool, I believe that America Is still and always will be the Innovator of the world. The financial collapse will In the end be a shining moment for United States that will begin a new era of economic expansion. The dollar will remain the world reserve currency for the forseeable future and beyond. Short term weakness and media negativity In the U.S dollar gives a contrarian like myself plenty of time to accumulate Investments that bet on a much STRONGER DOLLAR In the longer term. We started the Industrial revolution,and we will finish what we started when It Is all said and done. The pendulum swings In two directions,and when It swings back towards America It will stay there for a long long time.... TS

  • Report this Comment On March 28, 2011, at 3:40 PM, mikeinmadrid wrote:

    Buffett has never liked long bonds and has always predicted the decline of the dollar. Read his letters in the 80s when he predicted the demise of the 30 year bond.

    All paper currencies will decline in value. If you ask Buffett about the Euro he will say the same thing. which paper currency will decline faster is a tougher question.

  • Report this Comment On March 28, 2011, at 3:58 PM, uaku wrote:

    This fool recommend ARMH makes me think what sort of analysis these guys are doing. I would not pay more than $2 for this company based on DCF evaluation. Even if you use simple Ben Graham Method with margin of safety 50% one should not pay more than 2 dollars for this company. Sooner or later it will catch up with Its intrinsic value. I will pass thanks for the advise.

  • Report this Comment On March 28, 2011, at 4:32 PM, akutach wrote:

    topsecret10,

    http://en.wikipedia.org/wiki/Industrial_Revolution

    Not to take away from what this country has done to advance technology in the past ~150 years, but the industrial revolution did not begin here.

    Patriotism is fine, but you don't have to make stuff up to cast the US as something that it wasn't or to justify a forward looking assessment of the US economic outlook.

  • Report this Comment On March 28, 2011, at 4:50 PM, Darwood11 wrote:

    Of course Buffett "would much rather own businesses." Shouldn't you and I?

    Purchasing BRK-A stock via the market, is not at all the same thing.

    For example, B-H owns Dairy Queen. All of the earnings flow back to B-H. None of it is awarded to investors, who hope the value of the stock will rise. B-H keeps the cash, and doesn't waste it on dividends. Mr. Buffett has been quoted that giving a dividend "is a waste", as he is better able to use the money to good purpose than the average investor.

    That seems to be true.

    However, owning BFK-A or -B does not give me the same access as owning a company. I do own a business and I can state that from practical experience.

    If Motley Fool readers really want the advantages Mr. Buffett professes, then I suggest we each do get involved in a specific business, make the important decisions, and share in the risks and the rewards, which can be considerable.

    I have made more money in my business than i will ever make in the stock market. I assure you that $100,000 invested in my company by me, 10 years ago, did far more for me than purchasing BRK-A would have. ditto for the investments I made in my first business in 1978.

  • Report this Comment On March 28, 2011, at 5:25 PM, xetn wrote:

    So, Buffet finally sees the light. Many of us have been speaking out about this for 2 years.

    Here is yet another article addressing this very thing:

    http://mises.org/daily/5155/Where-Is-QE2-Taking-Us

  • Report this Comment On March 28, 2011, at 5:36 PM, plange01 wrote:

    the dollar is already worthless what does buffett want us to pay to give him more?he already has the most of them!!

  • Report this Comment On March 28, 2011, at 5:54 PM, warrenrial wrote:

    Obama sure is destroying this country.

  • Report this Comment On March 28, 2011, at 6:33 PM, rovobo wrote:

    where were you in 2008 when BUSH was our beloved leader he did'nt just bail his cronies he bailed out HIMSELF,Thank God he could'nt run again, we could have invaded EGYPT, LIBIYA and SYRIA and maybe YEMEN ,He would do anything his SAUDI ARABIAN friends wanted.

  • Report this Comment On March 28, 2011, at 8:10 PM, joaquingrech wrote:

    I don't agree with the article. These are Buffett's words

    "If you ask me if the U.S. Dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not."

    He is talking inflation. He is not saying that the dollar will lose value in respect with other currencies. He is saying it will lose purchasing power due to inflation. Although they are related, they are not necesarily the same.

    Here in Europe, we are looking at the same problem. Due to all the govt interventions we are getting worried about coming inflation. The Euro or Pound will not have the same purchasing power. How will it behave in reference to the dollar? I have no clue and I don't think Buffett was insinuating that either.

    In fact, if he thought the $ was going to depreciate against other currencies, he would not hold cash which is basically what he said he is doing: sold long-term bonds and flipped into more liquid instruments: cash & bills, so that it can look for investments that will return better than inflation and the industry. Long-term bonds would not achieve this, that's why he is getting rid of them.

  • Report this Comment On March 28, 2011, at 10:32 PM, TMFDitty wrote:

    @joaquingrech: Those are actually excellent points. Thanks for pointing this out.

    About the only quibble I would make is that Buffett is not holding cash for cash's sake. He has publicly stated that this money is earmarked for "elephant hunting." He is matching actions to words, and looking to use Berkshire's cash to buy more businesses.

    TMFDitty

  • Report this Comment On March 29, 2011, at 12:24 AM, FoolSolo wrote:

    @TMFDitty, I have read elsewhere that Buffet was going elephant hunting, and he did indeed bag one last week in Lubrizol. However, I'm not convinced that the UK will fare better than the US in re-inflating their corresponding currencies. Europe and the UK depend on USD reserves, and as a result they are somewhat hitched to the US, and will often follow US lead. There may be short-term fluctuations, but Europe is also dealing with economic crisis in Ireland, Greece, Portugal and Spain, and we can't be sure yet how that situation plays out. For example; Ireland may very likely raise their corporate tax rates, which may cause American companies registered in Ireland, like Seagate and Accenture, to pull out move to US, or some other place.

    Europe's dependence on Russian energy may also lead to some interesting outcomes if they decide to shift currency reserves out of USD.

    If hedging of the USD, or capitalizing on the erosion of the US currency is the point of the article, then energy and precious metals are far more currency neutral, and would like provide better protection against economic uncertainties in Europe, middle east and Asia. If you want to add a tinge of growth to these commodities then you can always invest in the leading international companies that mine gold, silver and oil, which allows you to benefit from the currency hedge as well as strategic corporate earnings growth. For example, GoldCorp, Silver Wheaton, Yamana Gold, National Oilwell, and various oil drillers appreciate from their respective commodities as well as good corporate earnings growth.

  • Report this Comment On March 29, 2011, at 1:33 AM, mm5525 wrote:

    If Warren's right, and you agree with him about our USD becoming the US Peso, I suggest buying Philip Morris International (PM) as a great anti-USD hedge. It yields 4% at current levels, sells Marboros and other cigarettes (a fairly recession-proof product) all over the world outside the US, and THEN converts all earnings INTO US Dollars.

  • Report this Comment On March 29, 2011, at 10:24 AM, joaquingrech wrote:

    @TMFDitty true, that was the last line of my comment. So we agree on that one :)

    I'm surprised he is looking to invest the big chunk of the money on the US though. Eventhough he is traveling around the world, he is looking to put the $ at home. I guess in companies that have international exposure but nevertheless surprising. He used to be in love with korean companies.

    As for $ vs Pound. Currency trading is completely out of my league. Would you mind expanding on your view why the Pound would behave better? What about the Euro? Maybe in another article :)

  • Report this Comment On March 29, 2011, at 3:26 PM, AvianFlu wrote:

    When will these overly negative doomsayers like Warren Buffett and Peter Schiff shut up?! Everything is fine and I am going to invest my entire portfolio in 30 year treasury bonds....for safety. Also...there are no signs of inflation.

  • Report this Comment On March 29, 2011, at 10:23 PM, mm5525 wrote:

    If you're comfortable with the government paying you 4.53% on your money over a 30-year time span with a 13 trillion dollar U.S. debt that rises by 4 billion dollars a day in interest alone, be my guest. However, not even the Republicans are slowing down the deficit, and with all the baby boomers nearing Medicare and endless entitlements, this country is going to have to offer higher interest rates to compete. The Treasury is offering endless supply of U.S. debt biweekly. Sooner or later, the laws of supply and demand are going to win out. We are one bad treasury auction away from much higher rates or QE3, QE6. Pick your poison. Lock in at 4.53 if you so choose, but when long-term rates NORMALIZE at much higher levels, you're going to be pretty upset with your 4.53%.

  • Report this Comment On March 30, 2011, at 12:11 AM, TMFDitty wrote:

    @joaquingrech: It is not so much that the GBP would "behave better" than the USD. It's more that Britain is devaluing the GBP more immediately, and more determinedly, than the US is devaluing the USD (for now).

    As far as the implications for currency trading go ... I'll punt on that question for now. But as far as this affects corporate profits, the advantage goes to the country that devalues first, and fastest. In Euro-land, the difficulty will be that the fringe states (PIIGS) have more incentive to devalue than do core, efficient producers such as Germany. Honestly not sure how that will play out, or which way the EU will ultimately go.

    TMFDitty

  • Report this Comment On March 30, 2011, at 6:46 AM, giochiwinx wrote:

    exceedingly interesting post. field new inovations

  • Report this Comment On March 31, 2011, at 6:41 PM, whomonkyoulus wrote:

    And that concludes our obvious statement of the day...

  • Report this Comment On April 05, 2011, at 10:28 AM, NinjaHamster wrote:

    @Topsecret0 - "America is and ALWAYS WILL BE the innovator of the world" ... LORD, is anybody really that dumb ?? Maybe I am just getting confused as I couldn't tell whether you were speaking Roman, Egyptian, Ancient Greek or one of the languages of all the other great Empires who always have and always will rule the world.

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