[A-List] US economy: Buffett's inflation worries

["Michael Keaney" <michael.keaney@xxxxxx>]

Buffett warns of 'too low' US interest rates
By Andrew Gumbel in Omaha, Nebraska
The Independent, 03 May 2004

Warren Buffett warned of the dangers of looming inflation in front of nearly
20,000 shareholders who turned for the annual meeting of his Berkshire
Hathaway company at the weekend. The world's most famous investor continued
his attack on hedge funds and the current "fad" for derivatives, and
confirmed he had increased his bet against the US dollar because of concerns
over its record trade deficit.

Mr Buffett took questions from shareholders for nearly six hours along with
his longtime partner, Charlie Munger, at the event in Omaha, Nebraska. He
said he saw evidence of things "heating up".

"Inflation is the enemy of the investor in terms of real returns," he said.
The economy was growing and the Federal Reserve might be keeping interest
rates too low as inflation picked up. "They've perhaps been a little slow in
terms of moving up because the economy has heated up considerably," he said.
"Our underlying premise is that this country will do very well and in
particular it will do very well for business."

Berkshire owns dozens of businesses including the insurer GEICO, clothes
maker Fruit of the Loom and the ice cream chain Dairy Queen. He told
shareholders the companies that would be best suited for this environment
would be ones that either had unique products and services or were less
dependent on purchasing inflation sensitive goods.

On derivatives - an object of much scorn in the past because of the facility
with which companies have bent their holdings to massage their quarterly
results - Mr Buffett was characteristically scathing, although he did point
out that Berkshire had traded in them itself and that there were appropriate
ways of using and reporting them. In practice, however, they had often been
used to shift figures around from quarter to quarter in a way that was plain
"deceptive".

"I would predict that sometime in the next 10 years we will have some very
big problems accentuated by people's activities with derivatives," he said.

He used the example of the $6bn accounting scandal at mortgage financier
Freddie Mac to demonstrate the risks of derivatives. Despite having
intelligent board members, being chartered by Congress, and being followed
by dozens of Wall Street analysts, he said Freddie Mac could not get a hold
on the complexity of these financial instruments.

There were references to "auditors selling fraudulent tax shelters" and
"disgusting" mutual fund managers playing around with their clients' assets
to earn higher commissions. "People are getting terrible results from
consulting the experts," Mr Munger said.

Mr Buffett, the world's second richest person, responded to shareholder
groups who criticised him for a taking a seat on the board of Coca-Cola
because Dairy Queen and fellow Berkshire company McLane, a food distributor,
did business with the soft drink company.

Mr Buffett said that while their intentions might be proper these
shareholder groups, which include California pension fund Calpers, had taken
too technical an approach to corporate change, "A checklist is no substitute
for thinking," he said.

Mr Buffett said the larger Berkshire became, the more difficult it was to
find places to park its money. The company was sitting on a stockpile of
$31bn in cash at the end of 2003.

Mr Buffett, whose net worth was estimated by Forbes magazine at $43bn,
reflected on some of his mistakes.

He said that by being trigger shy on buying into Wal-Mart he cost Berkshire
$10bn. "If every shot was a hole in one it wouldn't make the game very
interesting," he said.

"You have to hit balls in the woods a few times."