WASHINGTON, March 8 (UPI) -- Stay away from the dollar.
That's the advice from the Oracle of Omaha this year to investors in his investment group Berkshire Hathaway.
"Before March 2002, neither Berkshire nor I had ever traded in currencies. But the evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come, so since 2002 we've heeded that warning in setting our investment course," Warren Buffett said in his letter to shareholders in releasing the group's 2004 annual report over the weekend.
The legendary investment group based in Nebraska run by the billionaire financial adviser reported profits surging 40 percent in the fourth quarter of 2004, largely on the back of a $2.3 billion gain as Buffett bet that the U.S. currency would continue to fall. The company increased its foreign currency contracts in 12 currencies to $21.4 billion from $20 billion in the third quarter. Buffett did not, however, disclose the exact position nor the precise currencies that Berkshire was invested in. Over the past 12 months, the U.S. dollar lost nearly 23 percent against the euro, while it dropped almost 14 percent against the Japanese yen.
But the 74-year-old financial guru did not shy from arguing repeatedly that economic fundamentals point to the likelihood of the greenback continuing to fall in coming years, for the most part due to the ever-growing U.S. trade deficit with the rest of the world.
"Our country's trade practices are weighing the dollar down. The decline in its value has already been substantial, but it is nevertheless likely to continue. Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial," Buffett said.
There is certainly no doubt that the trade deficit continues to increase, as it soared 24 percent in 2004 to a record $617.7 billion.
Of course, senior Bush administration officials, including the president himself, have repeatedly argued that one key factor for the ballooning trade gap is due to attractiveness of U.S. assets to foreign investors, rather than a decline in U.S. economic might.
Buffett nonetheless voiced his concern about increased foreign ownership of U.S. assets and the loss of domestic capital to overseas investors.
"Americans end up owning a reduced portion of our country while non-Americans own a greater part. This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8 billion daily ... consequently, other countries and their citizens now own a net of about $3 trillion of the U.S. A decade ago their net ownership was negligible," Buffett said. He added that if foreign investors were to earn 5 percent on the net holding, then the United States needs to send $5.55 trillion of goods and services abroad every year to service the U.S. investments then held by foreigners, which means that 3 percent of its annual output would be going offshore.
Not only that, "as time passes, and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world enjoys an ever-growing royalty on American output ... we are like a family that consistently overspends its income. As time passes, the family finds that it is working more and more for the 'finance company' and less for itself," Buffett said.
Yet equally worrisome these days is the fact that even foreigners are beginning to withdraw from the dollar market, which could push the dollar's value down still further.
For instance, the Bank for International Settlements reported Monday that Asian central and commercial banks excluding Japan held 67 percent of their total deposits in dollars as of September 2004, down from 81 percent in the third quarter of 2001.
Indeed, Chinese banks have reduced their dollar holding rate to 68 percent from 83 percent, while South Korea's central bank reported two weeks ago that it would be cutting back on its dollar reserves. Meanwhile, the BIS reported earlier this week that Middle Eastern central banks have cut the proportion of their dollar-denominated deposits to 61.5 percent from 75 percent over the past three years.
Of course, Buffett is not alone in warning against the burgeoning trade gap and the weakening of the dollar. In fact, even the Federal Reserve's Chairman Alan Greenspan has repeatedly cautioned policymakers about the unsustainability of the deficit. But so far, there has been no real solution proposed by the government to tackle the problem head-on and make an effort at least to cut down the size of the trade gap.
Meanwhile, Buffett warned that "there are deep-rooted structural problems that will cause America to continue to run a huge current account deficit unless trade policies either change materially or the dollar declines by a degree that could prove unsettling to financial markets."
"We hope the U.S. adopts policies that will quickly and substantially reduce the current account deficit. True, a prompt solution would likely cause Berkshire to record losses on its foreign exchange contracts," even though the bulk of Berkshire's investments remain in dollar-denominated assets.
But given the likelihood of the dollar continuing to lose its value even further, it may well be that Buffett will follow in the footsteps of fellow billionaire financier George Soros and head of the Quantum Investment Fund, who consolidated his own fortune by betting on the devaluation of the pound sterling in 1992.
