ECONOMICS: Bearish on Buffet
Wesbury, Brian S.
ECONOMICS BRIAN S. WESBURY Bearish on Buffett BUFFETT IS BEARISH on the United States, and he's bullish on Europe. For the first time in his life, starting in 2002, Mr. Buffett entered...
...Eventually, even Old Europe will be forced to change, but it won't happen fast...
...And, of course, these two developments are inextricably linked...
...But something interesting happened in May...
...This divergence was enough to test even the most bullish forecaster...
...This rare macro-economic bet was based on a belief that U.S...
...dollar was weak as a result of an excessively accommodative monetary policy...
...ECONOMICS BRIAN S. WESBURY Bearish on Buffett ARREN BUFFETT IS BEARISH on the United States, and he's bullish on Europe...
...The upwardly revised income statistics solve another riddle...
...government were spending beyond their means, and that the trade deficit was a sign of economic weakness...
...AsLL OF THIS BEGS A QUESTION: Why was the dollar o weak in the early 2000s...
...As a result, it is not for months (and sometimes years) after the fact that full information is available...
...During the 12 months ending in mid-June, his stock price was down roughly 7 percent, while the S&P 500 was up 5 percent...
...Buffett entered the foreign exchange markets and shorted the dollar...
...The U.S...
...The stock market voted "non" on this Berkshire investment strategy, just like the French and Dutch voted against the European constitution...
...It is these countries, not the U.S., that are profligate with spending and stingy with investment...
...Individual income tax revenues have grown much faster than incomes...
...Personal consumption in the U.S...
...I suspect the euro will survive and that New Europe will continue to lead the way...
...Corporate profits have climbed to an all-time record high, the U.S...
...The French voted against the constitution because they are afraid that it will force them to give up their 35-hour workweek and generous social welfare system...
...economy are a dime-a-dozen these days...
...conomy was weak, or somehow unstable...
...Buffett's anti-American investment sentiment has cost Berkshire Hathaway shareholders dearly...
...But gloom and doom forecasts about the U.S...
...Because people do not pay taxes on incomes they do not earn, the surge in tax revenues suggests that the underlying U.S...
...In order to accurately gauge incomes, the statisticians in Washington must wait for data from the state unemployment insurance systems...
...Conventional wisdom argued that a single European currency would force countries to move toward lower tax rates and freer capital markets...
...Then, it was President Reagan's tough stance against Communism, large budget deficits, growing trade deficits, Germany, and Japan that were bothering so many pundits...
...In order to hold interest rates below inflation, the Fed has forced liquidity into the economy to such an extent that it caused a drop in the value of the dollar...
...The French already have...
...Now, some are sug gesting that the failure of the constitutional votes will lead to a collapse of the euro system, and with it the pressures on the whining socialists in Europe toreform...
...Old Europe is slowly decaying as global competition undermines the ability of insular social welfare states to maintain the status quo...
...I am not willing to go so far...
...A strong U.S...
...Decentralization makes it harder to gather accurate measurements...
...This cannot be said for "Old Europe...
...Despite all this good news, pessimists took refuge in the belief that U.S...
...economy will help this adjustment process as well...
...It is the French who want to cling to the centralized social welfare system rather than adopt the more uncertain, but certainly more successful, decentralized free-market system...
...It's as if we rolled back the clock 20 years and it's the early 1980s all over again...
...This system forces French taxpayers to support an unemployed contingent that has reached 10 percent of the labor force...
...economy becomes more difficult to measure...
...Or was it that consumers and government were spending beyond their means...
...The Bureau of Labor Statistics revised income statistics over the past year...
...Through May 2005 total tax revenue rose 14 percent from the same time period in 2004...
...As in any other market, supply and demand are the dominant forces affecting the value of the dollar...
...consumers were spending beyond their means...
...It changes the entire picture...
...This is not what many had hoped...
...iok, Brian S. Wesbury, The American Spectator's economics editor, is Chief Investment Strategist at Claymore Advisors, LLC...
...Warren Buffett should just say "non...
...New Europe, especially the former Soviet bloc and Ireland, are fierce competitors, willing to embrace the entrepreneurial spirit of capitalism...
...JULY/AUGUST 2005 THE AMERICAN SPECTATOR 55...
...economy is much stronger than the pessimists believe...
...These revisions have become commonplace as the U.S...
...As this occurs the dollar will strengthen...
...The Fed cut the federal funds rate eleven times in 2001 and pushed it down to 1 percent by 2003...
...Through May 2005 total tax revenue rose 14 percent from the same time period in 2004...
...While his short position was profitable in 2004, he has lost more than half a billion dollars so far in 2005...
...Today's economy has more small companies and self-employed entrepreneurs...
...The government's statistical machinery was designed in an industrial era of large enterprises, time clocks, and paternalistic corporations...
...New data show that wages and salaries actually climbed 7.5 percent, not 5.7 percent...
...With the flick of a statistician's pen, a big part of 54 THE AMERICAN SPECTATOR JULY/AUGUST 2005 BRIAN S . WESBURY the doom-and-gloom story evaporated...
...stock market is more undervalued than it has ever been, and the unemployment rate has fallen back to 5.1 percent...
...The gloom and doom of the early 1980s proved to be nonsense, just as the current pessimism will prove wrong as well...
...Because the U.S...
...Being short, the dollar in this environment is not a great investment strategy...
...The data supported this view...
...Now that the Fed is boosting interest rates, monetary policy is slowly moving back toward neutral...
...This is a massive revision...
...As a percentage of GDP, budget deficits in Old Europe are larger than those in the U.S...
...And despite a series of rate hikes, the federal funds rate has been below inflation for over two years—the longest period since the mid-1970s...
...And when they are finally counted, the revisions are usually positive...
...Individual income tax revenues have grown much faster than incomes...
...Incomes have grown faster than spending, not the other way around...
...Today, it is President Bush's tough stance against terrorism, trade and budget deficits, China, and India that stir fear in the hearts of the doomsters...
...economy and so enthusiastic about Europe's...
...Average GDP growth has been less than half that of the U.S., while unemployment is almost double...
...consumers and the U.S...
...climbed 6.3 percent during the year ending in March, while wages and salaries only climbed 5.7 percent...
...None of the above is the answer...
...It's hard to figure out why Warren Buffett is so down on the U.S...
...New small business start-ups eventually show up on state records even if they are missed by federal statistics...
...The Fed has supplied more dollars than the world demanded, and the dollar dropped...
...Some Wall Street sources suggest that his breakeven exchange rate is $1.22/euro, so with the euro trading near $1.21 in mid-June, his short position was seriously in the red...
Vol. 38 • July 2005 • No. 6
