|Man Without Qualities|
Wednesday, June 01, 2005
Dutch voters just overwhelmingly rejected the European constitution by a vote of 63 percent to 37 percent in a consultive referandum. The turnout was 62 percent, exceeding all expectations. The Dutch "No" vote is expected to further weigh on the euro, which has slipped hugely since the French rejection of the treaty on Sunday.
The biggest individual short-term loser may by Warren Buffett. From Forbes:
Warren Buffett['s] ... Berkshire Hathaway has a $20 billion bet in favor of the euro, the pound and six other foreign currencies.... [H]e is not about to cover his short position on the dollar. Buffett said that he began buying foreign currency forward contracts when the euro was worth 86 U.S. cents, and kept buying until the price reached $1.20. It's now worth $1.33. Buffett said he is not adding new positions now but has been rolling over contracts as they mature.... Now some of [his] assets are antidollar assets. Example: In 2002 he bought bonds of Level 3, a telecom company, that were denominated in euros. In 2000 Berkshire picked up MidAmerican Energy, a gas pipeline company. ... But here's a long-term perspective. He says he may hold foreign currencies "for years and years."
Mr. Buffett can hold his euro positions for as long as he likes, but American accounting rules pretty much require that Berkshire Hathaway mark those positions to market in its SEC filings. And with $20 billion on the line, the aftermath of the Dutch vote and gathering European economic storm clouds have got to take their toll on Berkshire-Hathaway:
The euro's 10.1 percent slide to start this year is its steepest since the first five months of 2001. Europe's common currency is retreating as the region's economy falters. The economic expansion in the U.S. is poised to exceed Europe's for a fourth straight year.
In the Forbes magazine interview linked above, Mr. Buffett defended his currency speculation in various ways, including this:
A continuing fall in the dollar "could cause major disruptions in financial markets. There could be unpredictable side effects. It could be precipitated by some exogenous event like a Long-Term Capital Management," Buffett says, referring to the 1998 collapse of a steeply leveraged hedge fund.So very true. And that's one of the problems with currency markets (or, as insiders call them, the "casinos of the very rich"): they are subject to all kinds of unpredictable side effects and exogenous events.
You know, unpredictable side effects from exogenous events like the Europeans unexpectedly rejecting the EU Constitution that everyone thought would be adopted easily only six weeks ago - and the euro falling to an eight-month low against the dollar. And how about unpredictable side effects from exogenous events like stories claiming that the German finance minister and the president of the Bundesbank were present at a meeting at which the possible break-up of European Monetary Union was discussed, and that the German Bundestag commissioned a report on the legal repercussions of a country wishing to leave the EMU, reports that Germany’s finance ministry had to publicly label “absurd?” [More unexpected side effects from exogenous events: Italy should consider leaving the single currency and reintroducing the lira, Welfare Minister Roberto Maroni said in a newspaper interview on Friday.]
Last quarter, Berkshire lost over $310 million in currency trading because of a stronger dollar over that quarter. But the dollar has done even better against the Euro this quarter than last quarter - as indicated in this chart. Berkshire Hathaway's overall currency positions are complex. They go beyond mere currency futures, into euro-denominated bonds (euro-interst rates are expected to go up following the French and Dutch "no" votes) and "imbedded" euro positions in investments. So it's tough to quantify exacty what the consequences of the strongly rising dollar will be for the company. But it's unlikely to be less than a very serious set back - especially if Mr. Buffett has been putting his money where his public doomy-gloomy dollar riffs are (not always true of the Sage).
Mr. Buffett famously owns homes in Omaha and Laguna Beach, California. I have no idea where he is at this moment. But if he's in Laguna, perhaps he's watching these unpredictable side effects from exogenous events from his own comfy living room:
A landslide sent 18 multimillion-dollar houses crashing down a hill in [Laguna Beach,] Southern California early Wednesday as homeowners alarmed by the sound of walls and pipes coming apart ran for their lives in their nightclothes. At least four people suffered minor injuries.
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