Warren Buffett is called the Oracle of Omaha, and with good reason. Like an oracle, he deftly dodged the dot-com bubble, while speculators derided the super-investor for not understanding the "new economy." A few years later, in 2005, he dubbed derivatives "financial weapons of mass destruction" well before the current financial crisis hit and positioned his company Berkshire Hathaway
So it's only with great nerve that anyone calls out Buffett on the next financial craze, but so it is. And this time it's about the municipal bond market, which Buffett has called a "terrible problem." I call Buffett's prediction the first sign of the muni bond apocalypse. The second sign is the denials that inevitably follow the predictions of the wise.
"When it comes to municipal bond defaults, both Warren Buffett and Meredith Whitney are not only dead wrong, they are out of their league," said Richard Larkin, senior vice president and director of credit analysis at investment bank Herbert J. Sims. The quote comes from notes sent to CNBC before an interview with Larkin. Whitney has infamously claimed that U.S. cities will face a wave of defaults. Herbert J. Sims is a national underwriter of tax-exempt bonds for senior housing and long-term care providers and specializes in financing projects for the elderly.
Buffett, the most successful investor of all time, out of his league? Sure, it makes a great headline ...
Buffett moved Berkshire into offering private insurance on municipal bonds in 2008, so he's got plenty of info on what's going on. As always, with the move the Oracle was trying to exploit mispricings in the multitrillion-dollar muni market, but he remains none too sanguine: "I don't think Moody's
Buffett has also suggested that municipalities would be inclined to simply default on their obligations to the extent that their bonds are insured by those not living in their communities. That would put further pressure on bond insurers such as MBIA
So a lot of what happens, according to Buffett, depends heavily on the actions of the federal government. Is Buffett right? He's done quite well so far at dodging bullets.
All this is not to say that Buffett is infallible. He's made his share (smaller, to be sure) of stumbles. Buffett acquired shares of ConocoPhillips
But small mistakes like those pale in comparison to Buffett's swift moves during the panic of 2008, when he secured sweetheart deals with Goldman Sachs
Even with minor flubs in individual investments, Buffett's been too right for too long on the big shifts in the finance world. Would you have enough nerve to call him out?
Jim Royal, Ph.D., owns shares in Berkshire. Berkshire Hathaway and Moody's are Motley Fool Inside Value recommendations. Berkshire and Moody's are Stock Advisor picks. Motley Fool Options has recommended writing puts on Moody's. The Fool owns shares of Berkshire Hathaway. The Fool owns shares of Berkshire. Try any of our Foolish newsletter services free for 30 days. 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.