Templeton Trepidations, Buffett Battle Stations
by Bill Fox
America First Trust Financial Services
financialsense.com
According to Gary Moore, who serves as a media spokesman for Sir John Templeton, the legendary investor “…Surprised even me [a few weeks ago] by suggesting that we avoid [U.S.] stocks altogether as the money that was in tech has moved to cheaper stocks around the world…John primarily suggested sovereign debt from Canada, Australia and New Zealand. He’s been there the past three years, principally in Canadian zero coupon treasuries.” When a reporter who wrote the article “"Templeton Feeling Bearish,." (Sarasota Herald Tribune, Oct 14, 2003) asked about the prediction that the dollar would slide 40% in a special Economist report, Gary Moore assured the Herald Tribune reporter that he had the feeling that Sir John wouldn’t waste much time arguing with that prediction. However, it is more Sir John’s style to say, “The odds are better than even…” rather than give a specific number. (Please note Gary Moore’s letter in the Appendix of this article for more complete background on Sir John Templeton’s views.)
The dollar index has already lost about 24% of its value since Jan 2002. John Templeton’s continued dollar bearishness implies that the unhedged gold stock index (HUI), which is already up over 400% from its low in late 2000, could run further. Precious metals have a strong historical inverse correlation with the strength of the dollar.
Billionaire investor Warren Buffett said in his Oct 27, 2003 Barron’s interview that he sold $9 billion in long term U.S. Treasuries earlier this year and feels it is unwise to buy into the stock market at current levels. He has $24 billion in cash on the sidelines. There is no evidence that he has sold the 129.7 million ounces of silver that he accumulated in 1997.
In regard to currencies, Warren Buffett wrote the article: “America’s Growing Trade Deficit Is Selling the Nation Out From Under Us” (Fortune Online Edition: Sunday, Oct 26, 2003). He stated: “I am crying wolf again [about the impact of mounting trade deficits, having first started his warnings in 1987] and this time backing it with Berkshire Hathaway's money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in—and today holds—several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.”
America’s Achilles Heel lies in the growing glut of dollars held by foreigners as America’s balance of trade deficits grow worse. Foreigners have bought 45% of America’s deficits, typically buying US government bonds with their trade surplus dollars rather than dumping them on the currency markets and driving the dollar lower. They have allowed America’s trade deficits to grow to 6% of GDP without forcing a currency crisis. Deficits over 5% of GDP historically enter high-risk territory.
The U.S. Government and Fed response has generally been cosmetic at best. From 1995 to 2000 U.S. Secretary of the Treasury Robert Rubin used currency interventions to artificially strengthen the dollar. The more recent funds rate cuts by the Fed down to 1% serve to artificially stimulate consumption and support asset bubbles amidst over 6% unemployment.
Deep structural problems make it unlikely that a declining dollar will completely eliminate the trade deficits soon. Many Asian countries inflate their currencies in line with dollar declines and have vast pools of peasant labor always willing to work for less. Many American business leaders focus on short-term profits and neglect the reinvestment required to competitively advance quality and innovation at home. Many American consumers are addicted to buying more foreign goods with more debt.
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