Buffett frets over U.S. debt, trade imbalance; Warren Buffet's Annual Newsletter

Warren Buffet's Annual Newsletter - PDF
Buffet, Berkshire Hathaway
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Buffett frets over U.S. debt, trade imbalance
Thu Mar 1, 2007 9:20 PM ET

By Jonathan Stempel

NEW YORK, March 1 (Reuters) - Warren Buffett said on Thursday the U.S. economy may not enjoy a "soft landing" because Americans are taking on too much debt as the U.S. trade deficit worsens.

In his annual letter to shareholders of Berkshire Hathaway Inc. , Buffett said he has nearly eliminated Berkshire's more than four-year-old stake in foreign currency contracts, a bet the U.S. dollar would fall, as the holding company buys more foreign stocks and companies directly.

He nevertheless said it is unwise to remain over-reliant on debt. Last year, the U.S. trade deficit rose 6.5 percent to a record $763.6 billion, while the personal savings rate was negative for a second consecutive year.

"Americans will live better 10 or 20 years from now," Buffett wrote. "But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position.

"At some point in the future U.S. workers and voters will find this annual 'tribute' so onerous that there will be a severe political backlash," he continued. "How that will play out in markets is impossible to predict -- but to expect a 'soft landing' seems like wishful thinking."

Buffett said he had "long wanted" to expand internationally, and was successful in 2006. Berkshire bought a controlling stake in Israel's Iscar Metalworking Cos.

It also invests in French drug company Sanofi-Aventis , Korean steelmaker Posco <005490.ks>, Chinese oil company PetroChina Co. <0857.hk>, and U.S. companies with large foreign stakes such as Anheuser-Busch Cos. , Procter & Gamble Co. and Wal-Mart Stores Inc. .

"Foreign countries hold growing amounts of our currency reserves," said Thomas Russo, a principal at Gardner Russo & Gardner in Lancaster, Pennsylvania, whose largest investment is Berkshire. "If they stop reinvesting in the U.S., the terms we will need to attract them back could force U.S. interest rates higher, and that's not a soft landing. Alternatively, rates don't rise but the dollar could drop. That's also not a soft landing."

MAKING MONEY ON ENRON

Berkshire began investing in currency contracts in 2002, and has bet on at least 13 foreign currencies.

Although it hasn't always paid off, that bet against the greenback has resulted in a $2.2 billion gain, including an $839.2 million gain from the euro, Buffett said.

Back in 2002, the U.S. dollar was worth about the same as a euro. It is now worth about three-quarters of a euro.

Surprisingly, some profits came from Enron Corp., the energy trader that collapsed in a 2001 accounting scandal. Buffett said he bought $82 million of euro-denominated Enron bonds in 2002 and 2003 -- and this led to a $270 million gain.

Buffett, however, reduced the currency stake to about $1 billion at year-end, from more than $21 billion in 2005, after the U.S. Federal Reserve began its campaign of 17 straight interest-rate increases.

Still, Buffett said with a trade deficit equaling 6 percent of gross domestic product, the United States risks becoming overdependent on foreigners to support its economy.

"Our course is unwise," he said.