Buffett Calls Federal Reserve History's Greatest Hedge Fund
Comment of the Day

September 20 2013

Commentary by David Fuller

Buffett Calls Federal Reserve History's Greatest Hedge Fund

Here is the opening and a latter section of this interesting report from Bloomberg, which also has a video with Buffett
Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank's ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

"The Fed is the greatest hedge fund in history," Buffett told students yesterday at Georgetown University in Washington. It's generating "$80 billion or $90 billion a year probably" in revenue for the U.S. government, he said. "And that wasn't the case a few years back."

The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S. Bernanke and other Fed policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.

The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed "is under no pressure, none whatsoever to have to deleverage," Buffett said. "So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that's never quite been done on this scale. It will be interesting to watch."


Buffett praised Bernanke for signaling in 2008 that he'd do whatever was needed to stabilize markets and said the next chairman should follow his approach to economic stimulus. Investors expected a taper by Bernanke, who said Sept. 18 that he wants to see further gains in U.S. employment before scaling back the bond purchases.

"He says he's going to keep doing it until he sees more improvement in the economy, and I think he's been mildly disappointed -- not hugely disappointed -- in the rate of improvement in the economy in the last few years," Buffett said. "He's not pre-judging exactly when it's going to happen, he's telling you the conditions under which he'll change."

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said the decision not to slow bond buying was a close call and "small" tapering is possible next month.

"That was a borderline decision" after "weaker data came in," Bullard said today on Bloomberg Television's "Bloomberg Surveillance" with Tom Keene. "The committee came down on the side of, 'Let's wait.'"

David Fuller's view Basically, as the public, financial institutions and corporations deleveraged, Mr Bernanke's Federal Reserve leveraged itself to prevent the economy from really collapsing. A number of other central banks have followed similar policies, including the Bank of England and the European Central Bank under Mario Draghi.

Maestro Warren Buffett and all reasonably savvy investors have done well since mid-2009 because many leading corporations have prospered relative to the slowly recovering global economy. Corporations, led by the multinational global Autonomies favoured by Fullermoney, reduced overheads, strengthened their balance sheets in the low interest rate environment, invested in rapidly improving technologies, and prospered by servicing the global economy, including the rapidly increasing middle classes in developing countries.

Stock markets have had three 'reassuring surprises' this month: 1) President Obama did not bomb Syria after all; 2) Larry Summers, Obama's nominee to lead to the Fed, withdrew his name; 3) Ben Bernanke did not commence QE tapering this week as Wall Street pundits had predicted. Consequently, hasty short covering and some relief buying pushed most stock markets back up into overbought territory, which you can see on the Stochastic indicators in the Chart Library and on this weekly chart of the DJ World Stock Index. (To do this yourself, click on 'Charting' link in the gray toolbar above each graph; then click on the menu chevron in the 'Analysis' section, select 'Stochastics' and adjust the numerical sequence as preferred.)

Meanwhile, note in the article above Federal Reserve Bank of St. Louis President James Bullard's comments about: "… a borderline decision" by the Fed after "weaker data came in". He added, somewhat quixotically and unexpectedly, that "small" tapering is possible next month. Investors may not now feel so reassured that this will not take place before December at the earliest.

Vladimir Putin, you may recall, told the Russian nation in 2005 that the collapse of the Soviet Empire "was the greatest geopolitical catastrophe of the century"! That was in character, judging from previous and subsequent events. Therefore, Mr Putin's overnight conversion from a KGB svengali into a white knight who wishes to reduce chemical warfare by persuading Syria's Assad regime to hand over its poison gas arsenal is stretching credulity. I would love to be proved wrong on this point but until then, the possibility for additional tensions over Syria, the Middle Eastern region and perhaps even between Russia and the West remains. Additionally, a new political battle in the US is imminent as you can see from this Bloomberg article: Republicans Warn of Shutdown as Confrontation Escalates.

In conclusion, I do not think that we need to panic over any of these uncertainties or problems, which are part of the investment environment. However, they will most likely extend the choppy market action that we have been expecting. One can ride this out in terms of stock market investment positions, as I intend to do, because the medium to longer-term background for equities remains broadly positive. For shorter-term investors and traders, it remains a somewhat volatile buy-low-sell-high environment, with activity exacerbated by high-frequency trading programmes, as we are seeing at present

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