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Well, Mr. Buffett, how grateful are you really? Are you and Charlie Munger honestly trying harder to help Uncle Sam carry his fiscal load? Certainly you are aware that your beloved Uncle Sam needs to borrow over a trillion dollars to cover his deficit for fiscal-year 2011. The company that you and Charlie run, Berkshire Hathaway, is one of the wealthiest and most liquid on the face of the planet. You decide how to deploy Berkshire Hathaway’s war chest of funds. Therefore, if your actions are consistent with your words, [/FONT][FONT=Times New Roman, Times, serif]
Berkshire Hathaway would have loaned Uncle Sam tens-of-billions of dollars; with such loans appearing on Berkshire Hathaway’s balance sheet as fixed maturity securities. Actions, ultimately, speak louder than words. [/FONT]
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So let’s see if Berkshire Hathaway’s latest financial statement (dated 9/30/10) reveals Warren Buffett to be a grateful nephew dedicated to helping Uncle Sam carry his considerable fiscal load. We must begin by examining Berkshire Hathaway’s balance sheet. At September 30, 2010, Berkshire Hathaway had $34.46 billion of cash and an investment portfolio of $117.08 billion. Hence, this company’s cash and investments totaled to $151.54 billion. Within this total, Berkshire’s fixed maturity securities amounted to $36.35 billion. By going to Note 4 of this financial statement, it is divulged that Berkshire Hathaway’s holdings of Uncle Sam’s debt obligations amounts to a paltry $2.25 billion. Uh, oh; I’m beginning to sense "ungrateful nephew" is a better description of Warren Buffett.[/FONT]
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To give some additional context as to why it is obvious Warren Buffett’s actions are completely at odds with his words, consider the following:[/FONT]
- [FONT=Times New Roman, Times, serif]Of Berkshire Hathaway’s total fixed maturity securities, only 6.2% were Uncle Sam’s debt obligations.[/FONT]
- [FONT=Times New Roman, Times, serif]Less than 2% of Berkshire Hathaway’s investment portfolio consisted of U.S. Treasuries and U.S. Agency debt (in other words, Uncle Sam’s debt obligations).[/FONT]
- [FONT=Times New Roman, Times, serif]Less than 1.5% of Berkshire Hathaway’s total liquid assets were comprised of U.S. Treasuries and U.S. Agency debt.[/FONT]
- [FONT=Times New Roman, Times, serif]Berkshire Hathaway’s foreign government fixed maturity securities totaled to $12.03 billion versus $2.25 billion of Uncle Sam’s debt obligations. [/FONT]
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With Berkshire Hathaway’s cash and investments of $151.54 billion, and Warren Buffett’s proclamation that he stands ready to work harder at helping the federal government carry its fiscal load, does it not seem duplicitous to have loaned Uncle Sam a trifling $2.2 billion. To add insult to injury, Berkshire Hathaway’s portfolio of foreign government fixed maturity securities exceeds U.S. debt obligations by almost $10 billion. Does this mean Mr. Buffett loves foreign governments five times more than he does Uncle Sam? Why are Buffett’s actions inconsistent with his words? Does the "grateful nephew" not trust his beloved uncle? Never in history has there been a time where Uncle Sam has become so dependent on the kindness of lenders. So, Uncle Sam, has Warren Buffett forsaken thee? [/FONT]
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Ah, the truth of the matter is that Warren Buffett has never trusted Uncle Sam. Is it not risky, after all, to lend to an entity capable of creating money out of thin air? This is the essence of what Warren Buffett wrote, on February 25, 1985, in his letter to the shareholders contained in Berkshire Hathaway’s 1984 annual report:[/FONT]
[FONT=Times New Roman, Times, serif]…we dislike the purchase of most long-term bonds under most circumstances and have bought very few in recent years. That’s because bonds are as sound as a dollar – and we view the long-term outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation.[/FONT]
[FONT=Times New Roman, Times, serif]Such a possibility may seem absurd, considering the rate to which inflation has dropped. But we believe that present fiscal policy – featuring a huge deficit – is both extremely dangerous and difficult to reverse. (So far, most politicians in both parties have followed Charlie Brown’s advice: "No problem is so big that it can’t be run away from.") Without a reversal, high rates of inflation may be delayed (perhaps for a long time), but [/FONT][FONT=Times New Roman, Times, serif]will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral.[/FONT]
[FONT=Times New Roman, Times, serif]While there is not much to choose between bonds and stocks (as a class) when annual inflation is in the 5%-10% range, runaway inflation is a different story. In that circumstance, a diversified stock portfolio would almost surely suffer an enormous loss in real value. But bonds already outstanding would suffer far more. Thus, we think an all-bond portfolio carries a small but unacceptable "wipe out" risk, and we require any [/FONT][FONT=Times New Roman, Times, serif]purchase of long-term bonds to clear a special hurdle. Only when bond purchases appear decidedly superior to other business opportunities will we engage in them. Those occasions are likely to be few and far between.[/FONT]
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To be sure, Warren Buffett has remained true to the words he penned nearly 26 years ago. Berkshire Hathaway, over the years, has avoided purchasing U.S. Treasury bonds because Warren Buffett and Charlie Munger distrust the long-term soundness of the dollar. Specifically, they fear the "…chance of runaway inflation." In spite of missing out on a major bull market in T-bonds, Berkshire Hathaway’s investment portfolio has performed so spectacularly well that Warren Buffett’s investment acumen has become the stuff of legend.[/FONT]
