If you can count on one thing from Warren Buffett of Berkshire Hathaway Inc. (NYSE: BRK-A) any longer, it is for him to stay very positive and upbeat about the long-term prospects of the United States. After S&P downgraded the “AAA” rating of the United States, Buffett told FOX Business Network that he does not get the downgrade and that it basically won’t change his investments.
In short, he thinks that S&P is off-base and said that the United States should be a Quadruple-A in ratings. He also said he thinks that this will have a limited impact if no new developments occur. He noted the debt being in dollars allows the United States to print its way out of debt payments, even if that does mean inflation.
Buffett has sat there for years and years with the public statements that America’s greatest days are ahead of it and that its history will somehow foster American growth. Quite simply, this is nothing more than Buffett “talking up his book.” We disagree with most of Buffett’s feel-good statements but we also understand his position. Could you imagine what might happen if the Oracle of Omaha announced to the world, “We have gone all cash, but only Euro, Yuan, Yen, and others. We sold all of our dollar-denominated debt and only hold stocks which will rise because of their overseas prowess.” That might cause a bit of a panic, even if it is physically impossible for Berkshire Hathaway to make such a move. It is also Buffett’s duty to stay upbeat because he owes it to Berkshire Hathaway shareholders.
Investors do need to understand the collateral damage of S&P’s action. First off, it happened to Japan in the 1990s and the end of the world did not occur. The main point is that this will domino into the municipalities which are under federal oversight, as well as almost all federal agencies, insurance companies, banks, and other institutions which have the bulk of their fixed income assets tied up in Treasury and federal agency securities.
As a reminder, Berkshire Hathaway is a significant shareholder in Moody’s Corporation (NYSE: MCO) as S&P’s credit rating rival. Buffett has lightened up on that position, but he owned it long before the ratings agencies saw a meltdown and he stuck with the bulk of the position.
JON C. OGG