Warren Buffett and Charles Munger speak

Fortune 500 | May 2, 2005 | Jason Zweig

[Jaysun]

I have to disagree with him on the trade deficit. It defies logic, but we're always at our best when we have a trade deficit. Perhaps that's why Warren lost a couple of hundred million in the currency market?

[demlosers]

The dollar is on the upswing... It won't be long before Buffet bails.

[blueberry12]

He lost?

Maybe that's what he says just so we would feel sorry for him. I say you cannot trust people with big money! It's interesting to hear what they have to say, but I wouldn't draw conclusions based on their views.

[snarks_when_bored]

You'll get a chance to do something extremely intelligent with your money in the next few years.

A promissory warning from a master.

[Doe Eyes]

we're always at our best when we have a trade deficit

I'm sure you have some basis for this statement. Please fill me in.

[blueberry12]

This ugly chart will have to change sooner or later. It could change if the US dollar would sink even further. The US dollar may go up for a short time (year or two), but the long-term trend is I believe down Down DOWN.

[Jaysun]

Maybe that's what he says just so we would feel sorry for him. I say you cannot trust people with big money! It's interesting to hear what they have to say, but I wouldn't draw conclusions based on their views.

I trade currencies and I have to say that it's WAY different than stocks. Warren's system is really quite simple. In a nutshell, he finds companies in which the stock prices haven't risen to reflect earnings. Eventually, the stock prices rise to reflect the earnings - and he makes a bundle.

[Jaysun]

I'm sure you have some basis for this statement. Please fill me in.

The first thing you should do is ask yourself why they're bad. Whatever your answer, prove it. Then continue reading below.

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Contrary to popular belief, the trade deficit is not caused by unfair trade practices abroad or declining industrial competitiveness at home. Trade deficits reflect the flow of capital across international borders, flows that are determined by national rates of savings and investment. This renders trade policy an ineffective tool for reducing a nation's trade deficit. Our exports have been going up.

Trade deficits don't cause rising unemployment. Quite the opposite (what's the rate right now? Pretty damned good). Look at the chart below and notice that unemployment was highest when the trade deficit was lowest. We actually had a trade surplus in 1975 (boy those were the days). Notice how unemployment - the blue line - drops as the trade deficit grows, and vice versa.


None of the common concerns about the trade deficit holds up to empirical scrutiny. Trade deficits cannot be blamed for unemployment or slower growth, nor are they a sign of unfair trade practices abroad or declining industrial competitiveness at home.

In the final analysis, nations do not trade with each other people do. Every international transaction that Americans engage in will, by definition, leave both parties to the transaction believing they are better off than before - otherwise the transaction would not occur. By this measure, the "balance of trade" is always positive, benefiting the nation as a whole.

We're by far the richest nation on earth. Doesn't it stand to reason that the nation with the most money will have the most to spend?

[blueberry12]

"We're by far the richest nation on earth. Doesn't it stand to reason that the nation with the most money will have the most to spend?" Yes, but a growing trade deficit means that US dollar is going overseas and foreign products are coming in. So, money is going out of the US which means we have less and less money to spend. Am I wrong? "Every international transaction that Americans engage in will, by definition, leave both parties to the transaction believing they are better off than before - otherwise the transaction would not occur. By this measure, the "balance of trade" is always positive, benefiting the nation as a whole." Yes, but trading does not mean that in the end both parties will profit. Both parties may be better off RIGHT NOW; but as time passes, they find out who had a better deal. If it were true that both parties profit from trading, then nobody would lose money on Wall Street, for example, because both parties (sellers and buyers) would end up with a profit. That sounds impossible...

[blueberry12]

"We're by far the richest nation on earth. Doesn't it stand to reason that the nation with the most money will have the most to spend?"

Yes, but a growing trade deficit means that US dollar is going overseas and foreign products are coming in. So, money is going out of the US which means we have less and less money to spend. Am I wrong?

"Every international transaction that Americans engage in will, by definition, leave both parties to the transaction believing they are better off than before - otherwise the transaction would not occur. By this measure, the 'balance of trade' is always positive, benefiting the nation as a whole."

Yes, but trading does not mean that in the end both parties will profit. Both parties may be better off RIGHT NOW; but as time passes, they find out who had a better deal. If it were true that both parties profit from trading, then nobody would lose money on Wall Street, for example, because both parties (sellers and buyers) would end up with a profit. That sounds impossible...

[montag813]

A lot of what I see now reminds me of Sodom and Gomorrah.

Huh? Because of hedge funds? when the SAG 500 crashed? What is he talking about? these guys are just plain weird and full of themselves.

Buffett lost $2.3 billion in the past 10 trading days as the euro fell from 1.3100 to 1.2600. the next chart support is below 1.2500. Parity is likely within 18 months. The EC economy is horrible, and our trade and budget deficits are actually falling the last 2 months. Anyone who listens to Buffett is an idiot.

[montag813]

Perhaps that's why Warren lost a couple of hundred million in the currency market?

Actually, Berkshire reported a loss of $2.1 billion on his dollar short gamble. Our estimates show he lost an additional $2.3 billion in the past 2 weeks alone.

[montag813]

This ugly chart will have to change sooner or later.

Look at where the biigest rise in our trade deficit in history occurred...during the Klintoon regime.

One note: the trade deficit last month unexpectedly dropped sharply (along with the budget deficit)...this is what caused the recent Euro collapse through key support.

[montag813]

I too trade currencies. Mr Buffett should stick with his "simple" stocks.

[montag813]

None of the common concerns about the trade deficit holds up to empirical scrutiny.

Excellent analysis.

Next time you're in NYC, please allow me to buy you a beer.

[CharlesWayneCT]

But if there is an imbalance, obviously we came out on top. After all, we got actual goods and services, while the other guys got dollars.

Either dollars will remain strong, in which case everybody wins, or dollars will drop, in which case we still have all the great stuff we bought, and the other nations are stuck with a lot of worthless paper.

I realise that if the dollar drops like that, THEN we will be unable to buy as much from foreign sources -- and if that happens maybe we will have some domestic production start up, for a lot of what we buy it isn't hard.

Of course, if things get real expensive then we will buy less foreign stuff, it might slow down the economy, unemployment will rise, which will just make it harder to buy, which will mean dollars NOT going overseas.

But the thought that we have to find some goods we can sell others in order to come out ahead just doesn't make sense.

Any more than it makes sense to consider the trade deficit of Delaware vs the other states. Oh, you didn't know that Delaware had a massive trade deficit? Well, I don't know either, so far as I can tell nobody keeps that data (or nobody publishes it). I have to think that is because we realise it doesn't matter.

But why doesn't it matter from state to state, if it matters from country to country?

[demlosers]

We're by far the richest nation on earth. Doesn't it stand to reason that the nation with the most money will have the most to spend?

Bingo. I may add the US economy creates new wealth better than the rest. And much of the trade deficit can be contributed to oil or US companies moving their manufacturing base to overseas location.

[demlosers]

the next chart support is below 1.2500. Parity is likely within 18 months. The EC economy is horrible, and our trade and budget deficits are actually falling the last 2 months. Anyone who listens to Buffett is an idiot.

LoL! You're right on. I've been saying the dollar's downfall has reached a high water mark and is now on an upswing. The good US economic data is getting harder and harder for people to ignore.

[Jaysun]

Yes, but a growing trade deficit means that US dollar is going overseas and foreign products are coming in. So, money is going out of the US which means we have less and less money to spend. Am I wrong?

Yes, but trading does not mean that in the end both parties will profit. Both parties may be better off RIGHT NOW; but as time passes, they find out who had a better deal. If it were true that both parties profit from trading, then nobody would lose money on Wall Street, for example, because both parties (sellers and buyers) would end up with a profit. That sounds impossible...

This may not be a perfect example, but I can't think of a better way to explain it. Let's say you get a job for the first time and your income is $500 per week. After a few weeks you decide to go to the mall to get some things for your apartment, and let's say that you spend $50, and you continue to spend $50 per month at the mall. Now you're running a "trade deficit" of -$50 per month and the mall is running a "trade surplus" of $50 per month. After working three years you get promotions and raises and now you're making $2,000 per week. Let's suppose that by now it's not abnormal for you to spend $750 at the mall every month. Your "trade deficit" has grown - it's 15 times higher than it was just 3 years ago!

The fact is that you're spending more because you're making more. The fact that you're able to spend $750 per month on the things you want and need is a positive thing - it shows that you're doing well. The flip side of that is your loser pal from high school. He doesn't work and he never has. He also has a very low "trade deficit".

So it is with America.

Does that make sense?