Buffett's secret

Warren Buffet, world’s most famous investor, acquired Burlington Northern Santa Fe this week. It has been the biggest investment of Buffet all time.

Since around halfway the recession Buffett started to talk about buying American shares again; he said he might be for 100% invested if the prices kept declining. However, prices kept declining and he kept tens of billions of cash.

So what’s happening? Isn’t Buffett certain about the future of the market? What is it Buffett can be afraid for?

In his column in the New York times he wrote: “ In nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenback emissions.” (…) For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 per cent of the gross domestic product. This fiscal year, though, the deficit will rise to about 13 per cent of the G.D.P., more than twice the non-wartime record. In dollars, that that equates to staggering 1.8 trillion. Fiscally, we are in uncharted territory.”

“During this fiscal year, it (the ‘net debt’ of the United States) will increase more than one percentage point per month climbing to about 56 percent from 41 per cent. Admittedly, other countries, like Japan and Italy have far higher rations and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this and we will find out.”

This is what he is afraid for, inflation!

Buffett said in 1977 that in times of inflation it is fantastic to own a toll bridge. The investments are done. The bridge is built with old dollars and doesn’t have to be replaced: money keeps flowing in.

Is Burlington Northern Buffett’s toll bridge? Isn’t this a way to secure his cash against the inflationary pressures?

This might be the perfect hedge: Buffett can easily just increase the price of using his rail and he is fine.
I think this is just another perfect move of Buffett; in the press he states that this is a bet on the American economy but I personally think he is betting on something completely else and closer to the opposite: He’s betting on inflation.

And for people who don’t have 44 billion to spend? I think gold, silver and platinum are good hedges.