Warren Buffett bracing for InflationJust as the specter of deflation is gaining ground, Warren Buffett is taking the contrarian view and positioning Berkshire Hathaway's (NYSE: BRK-A - News; NYSE: BRK-B - News) bond portfolio for higher inflation. Has he lost the plot?
Inthe second quarter, Buffett continued to rebalance Berkshire's $34.5billion fixed-income portfolio toward shorter maturity bonds, whichbonds are less sensitive to increasing interest rates. When interestrates go up, which, barring a Japanese "lost decade" scenario, willeventually happen, bond values go down -- but the shorter maturity bondsgo down less.
Buffett's inflation warning
Back in August 2009, Buffett wrote an opinion piece in the New York Timeswarning investors that lawmakers will be tempted to simply let the Fedprint away the exploding national debt instead of making hard choices,i.e., some combination of raising taxes and reducing governmentspending.
In this context, Buffett's actions make perfect sense for two reasons:
- Sure, the immediate risk we face is deflation, but the longer-term risk is, without a doubt, inflation. In that regard, Buffett isn't so much taking a contrarian view as he is taking the long-term view, which is exactly the perspective he has always adopted in his business and investment decision-making.
- Within a system as complex as the national economy, Buffett knows that inflation doesn't pop up on appointment; the timing is completely unpredictable, and it could happen faster than the market currently anticipates.