Foreign Currencies and Trade Deficit

[Xerxes]

Don’t know where to put this. just for discussion purposes. 
 

I am slowly crawling my way through Buffett letters staring 1990. I skipped the 1970s and 80s as I cannot relate to the companies he talks about. 

I am now in 2004. There is passage where he makes the case as to why Berkshire owned a kingly sum of $21.4 billion in foreign currencies. Twelve of them at that. 
 

Twenty years later, the deficit is even larger.
 

Today, his position in Japan could be akin to his views back in the day. Yet, the size of its foreign holdings today is very small to its large U.S. based holdings. 
 

It seems to me that it was huge in the early 2000s. 
 

[UK]

4 hours ago, Xerxes said:

 

Today, his position in Japan could be akin to his views back in the day. Yet, the size of its foreign holdings today is very small to its large U.S. based holdings. 

I think that today his JPY position is hedged by issuing JPY debt.

[gfp]

Yes, Berkshire is essentially short Euros and Yen and is one of the single largest owners of US T-bills. 

[Charlie]

37 minutes ago, gfp said:

Yes, Berkshire is essentially short Euros and Yen and is one of the single largest owners of US T-bills. 

gfp, why is Berkshire short Euro?

It is probably 90-95% US based, but short Euro?

 

Buffett was very good in the Euro/US Dollar trade, until he said something to the effect that it is outside his circle of competence.

Time showed he was right. 

 

[Blake Hampton]

Is it possible that the U.S. dollar is simply the world’s currency at this point?

 

This topic has always confused me, but I also think it's important as well as interesting.

[Blake Hampton]

 

This video is somewhat informative 

[gfp]

8 hours ago, Charlie said:

gfp, why is Berkshire short Euro?

It is probably 90-95% US based, but short Euro?

 

Buffett was very good in the Euro/US Dollar trade, until he said something to the effect that it is outside his circle of competence.

Time showed he was right. 

 

 

Other than very low interest rates at the time he borrowed I can't really answer that question for the big guy.  He's not hugely short the Euro but Berkshire is short by issuing bonds denominated in Euros.  General Re has a relatively small European investment portfolio that I suppose partially offsets some of that.  Japan and Japanese debt issues have been his more recent focus.

 

The eurodollar system (offshore synthetic dollar denominated instruments / derivatives not under the control of the US Treasury or Fed) is the de facto world currency.  It is just a unit of account, like the metric system.  Almost every large global currency related transaction has the USD on one side.  Even someone swapping from Aussie to Euro will probably most efficiently / cheaply accomplish it by AUD -> USD -> EUR

[Charlie]

1 hour ago, gfp said:

Other than very low interest rates at the time he borrowed I can't really answer that question for the big guy.  He's not hugely short the Euro but Berkshire is short by issuing bonds denominated in Euros.  General Re has a relatively small European investment portfolio that I suppose partially offsets some of that.  Japan and Japanese debt issues have been his more recent focus.

 

The eurodollar system (offshore synthetic dollar denominated instruments / derivatives not under the control of the US Treasury or Fed) is the de facto world currency.  It is just a unit of account, like the metric system.  Almost every large global currency related transaction has the USD on one side.  Even someone swapping from Aussie to Euro will probably most efficiently / cheaply accomplish it by AUD -> USD -> EUR

 

Thank you, gfp

[scorpioncapital]

the value of currencies probably has to do with both tangible and intangible factors - just like evaluating a company. If some country has too big of a government sector, it might have a poor stock market but the currency may still be strong enough. But when even the government involvement in foreign policy and trade comes up against the same walls that an individual or business might like debt, economic freedom, tariffs, wasteful and unproductive spending, then the currency could weaken as well. 

[Xerxes]

And just a few letters later the large FX position is largely closed out.
 

 

[Spekulatius]

If he held these positions until 2008, it would have been a disaster , despite even higher Federal spending.

[Blake Hampton]

1 hour ago, Spekulatius said:

If he held these positions until 2008, it would have been a disaster , despite even higher Federal spending.

Curious, did you calculate how much he would’ve lost?

[Spekulatius]

Just now, Blake Hampton said:

Curious, did you calculate how much he would’ve lost?

 No, but I did hold foreign currencies in 2008 as I own foreign stocks in IBKR and it wasn’t fun.

Foreign currencies like the MXN Peso are a disaster in these meltdowns as everyone goes into the USD. Traditionally, the yen was a hedge, but that seems no longer the case.