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Mar. 22 2010 - 10:05 pm | 633 views | 3 recommendations | 11 comments

Buffett a safer haven than US Treasury?

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

via Obama Pays More Than Buffett as U.S. Risks AAA Rating Update3 – Bloomberg.com.

Credit markets are typically the first to raise a red flag of trouble: Before the stock market crash of 1987, yields on bonds suddenly and, of course, unexpectedly surged. A few months later, the stock market crashed.  In 1997,  Russian bond yields were in triple-digit territory before the ruble crisis hit. And a few months later, the stock market crashed. In 2007, the global marketplace began to shudder under the weight of bad mortgage debt and, well, you know what happened to the markets in the fall of 2008.

Berkshire Hathaway, the castle Buffett calls home, is rated Aa2 by Moody’s and AA+ by S&P. The USA rating:  AAA. The price action in the corporate bond market is far from usual. In theory, those who were the triple-A crown can borrow more cheaply than anyone else in the credit kingdom. Bloomberg vividly explains:

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

More red flags:

Last week, Moody’s rattled the cages of the US debt market, by suggesting that the US may lose its coveted triple-A rating, an event  T/S colleague Michael Pollaro wrote about (don’t miss his graphics). As Bloomberg notes in its story on the Buffett bonds, Moody’s worries that US tax receipts may hit 7% of debt payments in 2010 and 11% by 2013; only the UK spends more. Memo to Moody’s: Last month, tax receipts accounted for nearly 16% of interest on the national debt.

Economists like Richard Koo of Nomura Securities argue that government needs to flood the market with cash because what we are experiencing is different from previous turndowns. Like Japan, we are undergoing what Koo calls a balance sheet recession. This is no time to choke a recovery, Koo and others argue. The recovery programs have helped to stabilize the economy, and as a result, Standard and Poor’s expect corporate defaults to plunge to 5% from 10.4% in February, Bloomberg reports.

This may be true. But there are important differences between Japan and the US, which carries a debt-to-GDP ratio of 88%. Investment firm Hedgeye focuses on this in its daily commentary this morning:

The Japanese currently have a debt-to-GDP ratio of almost 200%, and, as the narrative fallacy goes, they are fine.  This higher debt ratio is cool because most of it is owned domestically by the government (about half) and 95% of the remainder is owned by Japanese citizens, so foreign investors have very little sway.  In addition, Japan has very low interest rates, and its overall cost of servicing debt is 1.3%. All good, right? Being Japanese is cool?

Not exactly: Hedgeye fears for all the spending will be inflationary in the U.S. But even if that doesn’t pan out, Hedgeye notes that Japan is hardly worthy of imitation for another reason: Its stock market has been largely in a state of decline for the past 30  20 years.

Japan's high-debt has hurt stock market returns

 


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  1. collapse expand

    “Its stock market has been largely in a state of decline for the past 30 years.”

    I think you mean 20. Also, the Japanese government didn’t flood the market with cash throughout those 20 years. Koo’s talking about imitating policies of the past decade; not the past two decades.

  2. collapse expand

    Buffet is a safer play than US Treasuries just before Obama’s Billion dollar plus “health care reform”. What will the spreads look like once this monstrousity gets rolling?

  3. collapse expand

    Am I completely missing this: “Memo to Moody’s: Last month, tax receipts accounted for nearly 16% of interest on the national debt.”

    Do you mean to say that 16% of tax receipts went to pay the national debt last month? If so, I think you should say “Last month, interest on the national debt accounted for nearly 16% of tax receipts.”

    It’s very confusing the way it’s written, which leads me to believe that I’m not understanding something. They way it’s written, a high number would be better than a low number, not worse, but that doesn’t seem to be your point.

  4. collapse expand

    Eisenhower era top marginal tax rates would cure a lot of this. In other words ‘We don’t need no stinking billionaires’

  5. collapse expand

    Not to say that falling from a AAA rating wouldn’t be costly to the US and us, but, IIRC, weren’t those credit rating houses “exposed” fairly blatantly post-Fall ‘08? i.e. some of the flimsiest, most-derivative of these funds (known since to be extremely toxic) were rated quite highly by Moody’s and S&P?

    As far as Buffett’s track record vs. our government’s, it’s impossible to argue that Warren cut a *much* better deal with Goldman, e.g., than we did with TARP: He got $5 Billion in preferred stock PLUS $5 Billion more in warrants for shares at $115 (Goldman’s been trading at about $178). For our investment of at least $10 Billion, I believe we got back even-money.

    Requiring that kind of stake, accountability and RoI warrants more faith in him than US.

    And now you’ve got me in the mood for a DQ Blizzard and perusing The Buffalo News (after a good, long head-soak).

    • collapse expand

      Steve,
      The credit agencies are about as reliable as Ernst & Young and the other accounting firms that blessed the balance sheets of Lehman and compatriots. And both the credit raters and the accounting firms share one thing in common: The client pays them for their opinions. Investors in Buffett most likely justifiably don’t care what the rating agencies are saying.

      Buffett and Babe Ruth share something else in common — incredible long-term track records. And despite Buffett’s aw-shucks persona its clear he’s a much better negotiator than the Wall Street sophisticates. I believe he did pretty well with his investment in Salomon Bros, once the king of Wall Street. Buffett bought at 12% stake for $700 million in 1987, rescuing the firm from an unwanted bid Ronald Perlman. A few years later he temporarily ran the firm after Solly’s lead Treasury bond trader got caught breaking the rules during a government auction; Salomon was sold to Travelers in ‘91 and to this day retains its own *special* culture within Smith Barney, all of which had been part of Sandy Weil’s many-armed kingdom.

      And wow! I decided to follow your lead and just looked at The Buffalo News homepage, fewer calories than DQ. And much better than my former hometown newspaper. Maybe Buffett can save what’s left of The Baltimore Sun.

      In response to another comment. See in context »
  6. collapse expand

    Babe Ruth, in 1932, was asked why he was making more money than President Herbert Hoover. He replied, ” I had a better year than he did”. That is why Warren Buffett is getting a better bond rate than President Obama.

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