I apologize for how quiet it's been around here.
I wanted to hop on and discuss Warren Buffet's purchase of BNSF.
The world of course cheered the move. CNBC hyped this all day yesterday claiming that the "animal spirits" in terms of M&A were now back on Wall St!
Ha! Yeah right....
After laughing at this headline, I spoke with a very wise bond trader following the news. His take was the same as mine: This is a huge bearish bet on both the US Economy and the US dollar versus the bullish spin you see on CNBC.
When you break it down, how could you interpret this move any other way if you had a brain in your head?
I personally think this was a brilliant move by Buffet but it also scares the crap out of me. This is the LARGEST deal that Buffet has ever made with his money. He funneled a good portion of his cash holdings into this deal.
Why would the smartest investor in the world put most of his cash into an antiquated railroad system in the 21st century?
IMO Buffet did it for a couple of reasons:
#1: Fear of inflation. As a veteran of selling commodities, I understand the cost of transportation. The cost of rail is a fraction of shipping via truck. Does Warren fear $200 oil? I sure think so after watching him place a multi billion dollar bet on the rails.
#2: Hedging against the US dollar: Warren obviously sees the same writing on the wall that the world does(as well as me). He realizes we will most likely will never payback our $13+ trillion dollar deficit.
All you need to do is look at gold in terms of the lack of confidence in the US dollar or ANY world currencies for that matter.
The Bottom Line:
IMO, Buffet realized he needed to get diversify his dollar holdings. I am sure he was scared ****less when gold rose close to $1100 this week. I am also sure every central bank feels the same way.
Treasuries are also rising as a result of the deficit lunacy. Who knows what the bond traders will do if gold continues to soar. Will yields rise in order to keep up with gold? I sure think so.
Warren Buffet basically found the perfect opportunity to diversify out of the US dollar via his rail purchase without losing face around his so called "confidence" in the US Economy.
The networks and Buffet can spin this purchase positive for the economy all they want. The reality here is this is much more of a bearish bet on the economy versus a bullish one.
Warren obviously sees higher fuel costs or a crashing dollar down the road. Why else would you spend $10's of billions on an "old school" technology that's been around since the 1800's?
Ironically, one of the worst depressions we saw in this country was the aftermath of a railroad speculative bubble in the 1870's.
How fitting is this! What comes around goes around!
I want to thank Warren Buffet for reinforcing my belief that the US economy is toast.
Disclosure: No new positions but I agree with Buffet.