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:

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?