7 ms·

Warren Buffett compares US Fed to a hedge fund

40 points by newsign 13y ago

gfodor 13y ago
I don't understand this point of view, sorry Warren. The fed is generating revenue for the government in a certain sense, yes, but saying it is a successful hedge fund is like me saying that if I hold a bunch of bonds in my portfolio throwing off some interest that is a successful hedge fund. The entire question is what are they going to be able to sell those bonds back to the market for. If they end up having to sell them at a massive loss, which is likely, then all that revenue they've been throwing off in interest better offset those losses. I might have this wrong but it seems to be very odd to characterize the fed's QE programs as a success when it is literally an experiment in progress.
- hkmurakami 13y ago
  The Fed bought toxic assets at way below par value. These bonds are giving off interest, but their underlying value is going up as well. They also bought equity in companies like GM and AIG (iirc) for fractions of what they are worth today. I think Buffet used the term "hedge fund" for dramatic effect rather than strict accuracy (since most of the public sees hedge funds as the epitomy of the investing money making dogma), but you can definitely draw parallels between the Fed's investment decisions and those of a long-only hedge fund (rather than the algo or long-short variety)
  - dxhdr 13y ago
    "their underlying value is going up as well" How can you tell? These are illiquid bonds that have no market. The Fed could say they're worth anything and there's no way to prove or disprove it. The only way to know is to offer them for sale and obviously that's the opposite to what the Fed is doing.
    - deleted 13y ago
      [deleted]
    - jessedhillon 13y ago
      In the case where those toxic assets are mortgage-backed securities, the underlying is a house -- so we can tell by observing the housing market.
      - jonnathanson 13y ago
        Many of the mortgage-backed securities were so byzantine, so many orders of derivatives removed from the underlying houses, as to be nearly impossible to tie directly to housing. But that's a side point. The real point is that a lot of the mortgages originally packaged into those securities no longer exist, and hell, a fair number of those houses probably no longer exist. Yes, there's a huge supply of housing once again, and real estate is doing well across the country. But mortgages represent specific financial obligations, made in specific slices of time, between specific parties. The mortgages themselves are not fungible, and never could have been. They were bundled into individualized tranches, whose bases have probably evaporated by now. (We must keep in mind that the troublesome MBSes circa 2007-8 comprised subprime mortgages, and most of those subprimes went belly up).
- cremnob 13y ago
  The Fed can hold them to term. They are under no pressure to sell.
  - dxhdr 13y ago
    The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.
    - cremnob 13y ago
      They have choices. They have complete flexibility. They are under no pressure to do anything that isn't explicitly their goals. They want to control inflation and increase employment. If the economy starts to heat up and inflation starts to rise above their 2% target they will then have the option of selling bonds or raising the federal funds rate, the latter of which is more likely. I'm not really sure what you're trying to get at with the last comment. He doesn't know the exact number off the top of his head. The exact amount remitted last year to Treasury is $88.4 billion.
      - dxhdr 13y ago
        They are under extreme pressure to continue purchasing treasury bills from the government and mortgage backed securities and derivatives from banks. Even hinting that they'll start tapering these purchases has caused the equity markets to drop and rates to rise. Actually tapering will in short order throw the country into a recession. I'd be hard pressed to call that "complete flexibility."
    - preempalver 13y ago
      Agree, selling will be problematic. The fed's probably going to use reverse-repo to exit. See http://www.voxeu.org/article/exit-path-implications-collateral-chains http://www.voxeu.org/article/exit-path-implications-collater... and http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-the-zlbrepocollateral-scarcity-solution-weve-been-waiting-for/ http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-t...
dxhdr 13y ago
"'The Fed is the greatest hedge fund in history, ... it's generating $80 billion or $90 billion a year probably' in revenue" Can you get more asinine than that? Probably? How is this relevant when the Fed is printing $85 BILLION a month to finance ongoing bond purchases? Guys like Buffet must absolutely love the Fed because they have an outlet to offload their illiquid garbage bonds and derivatives. Imagine if you made a terrible investment that loses most of its value... you're screwed, you have no choice but to suffer, eat the losses, and move on. But wait! The government opens a shop where they'll buy your investment for close to you original principal. You're saved! Amazing. I'd write nonsense articles praising the government too.
- jonnathanson 13y ago
  Buffett has made a killing owning businesses that print money, invest on float, and whose risk is backstopped by the federal government. Businesses like insurance, finance, and so forth. The Fed is his bread and butter. It's his risk absorber. It makes total sense for him to keep playing this game, because he benefits so fantastically from it. Everyone else should take what he says for what it is. The agenda is pretty loud and clear.
- moocowduckquack 13y ago
  Illiquid bonds are only hard to spend now, but not necessarily unprofitable in the long run, especially if you can buy them cheap.
- onebaddude 13y ago
  >illiquid garbage bonds and derivatives. You can go to the FED site and look at all the bonds they purchased from the financial institutions. Outside of the Maiden Lane's, most of the bonds have increased in value. This was a profitable trade for the FED; liquid cash for bonds well below par.
- zeckalpha 13y ago
  I don't think you know anything about Buffett's investment strategies. If this is the way you think Buffett operates, you should read https://en.wikipedia.org/wiki/The_Intelligent_Investor https://en.wikipedia.org/wiki/The_Intelligent_Investor
wintersFright 13y ago
Buffet is just a shill for the USG in the confidence game of US treasuries. Sure the fed is under no pressure to sell, the pressure is really on the fed to not stop buying. QE infinity is all about hiding the fact foreigners are exiting treasuries so the fed is the last resort buyer of USG debt. Without the fed backstopping, interest rates paid by the USG on its debt would have to go up which would very quickly crash the system. Warren is just doing his patriotic duty to kick the can a little further down the road.
- brazzy 13y ago
  > the fact foreigners are exiting treasuries Can you back up that claim?
  - dataminer 13y ago
    http://www.reuters.com/article/2013/08/16/us-usa-economy-capital-idUSBRE97F02T20130816 http://www.reuters.com/article/2013/08/16/us-usa-economy-cap...
  - wintersFright 13y ago
    Actually, foreign Central Banks don't even need to dump treasuries to require QE Infinity - they can just reduce or stop absorbing the continual outflow of debt emitted by the USG. The USG has a trillion dollar+ yearly budget deficit. If central banks don't absorb that outflow of debt then either the USG reduces its spend (as if, those NSA datacentres aren't cheap), interest rates go up (USG will need will need even more debt to pay its debt) or the fed continues to buy it all up.
preempalver 13y ago
So 80Bil on 1 Trillion, ie 8% yearly return. Thats a shitty hedge fund
- bananashake 13y ago
  8% yearly is very good, especially for such a large portfolio with limited volatility. They have made quite a few good trades. I would not want to defend all of the fed's actions, though.
- dxhdr 13y ago
  It's 3.5 trillion and still rising. http://www.federalreserve.gov/releases/h41/current/ http://www.federalreserve.gov/releases/h41/current/
devx 13y ago
Can we have that full audit of the Fed yet?
yetanotherphd 13y ago
Nice clear thinking from Buffet. The ideas are very old, only the implementation is new. First, the Fed's actions are a mix of fiscal and monetary stimulus. They are not different to Keynes' idea of fiscal stimulus, since they inject money into the economy in cases where even zero interest rates couldn't. Second, in order for stimulus to work, it must convince people to make long term decisions (such as building physical factories, starting companies, buying durable goods, etc.) and therefore the Fed must commit to a long term stimulus plan. Buffet clearly outlines the Fed's approach to making this commitment. I know a lot of people on HN are deeply suspicious of mainstream macroeconomics, and that is understandable since even with my training I can't really verify that people in the field are doing things right. However, I will say that there are a large number of countries in the world that are big enough to have their independent macroeconomic policy. So far, no country I'm aware of has chosen not to use the above two principles, which together can be taken as a summary of neo-Keynsian economics. If there really some better way out there I think that some country would have tried it.
- abbazabba 13y ago
  You also have to consider the weight each country carries in a global economy. Everyone is tied to everyone else, and so there are bigger players and smaller players. If you are a country with an economy that does not do business with other countries (eg you do not import nor do you export), then you probably have more macroeconomic independence. So if China or Japan try to move independently, they can't, because in order to buy or sell goods to other countries, they have to buy and sell those other countries' currencies. And the business of buying or selling currencies is tied to macroeconomic policy.
  - yetanotherphd 13y ago
    I was implying that when I said "countries in the world that are big enough to have their independent macroeconomic policy", but that was somewhat glossing over the issues you've raised. I'm not a macro expert, but my understanding is that a country need not be completely autonomous in order to have its own macro policy. Goods cannot flow perfectly between countries, and so macro policy will always have some effect. The more a country imports and exports, and the smaller the country, the less impact its macro policy will have. So the reserve bank of China can influence Chinese interest rates and hence have an impact on the Chinese economy. On the other hand the reserve bank of a "small open economy" cannot do much to change interest rates.
codex 13y ago
The Fed is not driven by a profit motive, but rather acts in the best interests of the people of the United States. This makes it as opposite of a hedge fund as you can get. Buffett is tongue-lashing the Fed in public because Buffet's investments won't do well if inflation hits, and he wants the Fed to reabsorb all of the money it has printed before inflation appears.
- adventured 13y ago
  If the Fed acted in the best interests of the American people, they wouldn't have devalued the dollar by 97% over the last century, and they wouldn't continue funding the extreme fiscal irresponsibility of the US Government (including acting as the perpetual war fund). The primary interest of the Fed is not the best interests of the American people, but rather maintaining the solvency of the US Government at any cost (including destroying the middle class via gradual and persistent currency devaluation) and providing liquidity for the global economy (given the global reserve currency belongs to the Fed in the form of the Federal Reserve Note).
  - abbazabba 13y ago
    Why does it matter if the dollar is devalued? A less valuable dollar makes American goods cheaper, and foreign goods more expensive. People in other countries would rather pay for cheap American things, than something made in their home country. That money goes directly to the pockets of Americans. If the dollar is strong, then Americans will buy more goods made in other countries. So when Americans travel around, they will buy more things in those other countries. That money goes directly to the pockets of other countries. Is that in the best interest of the American people?
patrickg_zill 13y ago
If any person, non-profit, or regular corporation, ran their business the way the Federal Reserve did, they would be in jail as soon as what they were doing was public knowledge. The only reason we have this ridiculous system in place is because military force.
- Steko 13y ago
  I miss the good old days when monetary cranks would always come right out and talk about the Rothschilds and 'international bankers' so the average reader knew they were bonkers. Fiat money won everywhere because it outcompeted the alternatives. Fractional reserve banking too.
  - patrickg_zill 13y ago
    What part of having a gun pointed at your head, is "outcompeting"?
  - gpvos 13y ago
    So that means they followed the path of least resistance when they introduced it, instead of thinking it through. (Or they did think it through and it was the Rothschilds after all.) In biological evolution, the competition winner is often a more complex organism. Fiat money is more complex than the gold standard, and apparently won. But in the case of the economy, we should keep things simple enough that a large chunk of the population can still understand it. Otherwise, a small number of very specialized people will have such an information advantage that they can, and will be economically forced to, exploit all the others. I'm not saying that fiat money and fractional reserve banking are a problem, but they need to be regulated rather strongly to prevent problems.

40 points by newsign 13y ago

I don't understand this point of view, sorry Warren. The fed is generating revenue for the government in a certain sense, yes, but saying it is a successful hedge fund is like me saying that if I hold a bunch of bonds in my portfolio throwing off some interest that is a successful hedge fund. The entire question is what are they going to be able to sell those bonds back to the market for. If they end up having to sell them at a massive loss, which is likely, then all that revenue they've been throwing off in interest better offset those losses. I might have this wrong but it seems to be very odd to characterize the fed's QE programs as a success when it is literally an experiment in progress.

hkmurakami 13y ago
The Fed bought toxic assets at way below par value. These bonds are giving off interest, but their underlying value is going up as well. They also bought equity in companies like GM and AIG (iirc) for fractions of what they are worth today. I think Buffet used the term "hedge fund" for dramatic effect rather than strict accuracy (since most of the public sees hedge funds as the epitomy of the investing money making dogma), but you can definitely draw parallels between the Fed's investment decisions and those of a long-only hedge fund (rather than the algo or long-short variety)
- dxhdr 13y ago
  "their underlying value is going up as well" How can you tell? These are illiquid bonds that have no market. The Fed could say they're worth anything and there's no way to prove or disprove it. The only way to know is to offer them for sale and obviously that's the opposite to what the Fed is doing.
  - deleted 13y ago
    [deleted]
  - jessedhillon 13y ago
    In the case where those toxic assets are mortgage-backed securities, the underlying is a house -- so we can tell by observing the housing market.
    - jonnathanson 13y ago
      Many of the mortgage-backed securities were so byzantine, so many orders of derivatives removed from the underlying houses, as to be nearly impossible to tie directly to housing. But that's a side point. The real point is that a lot of the mortgages originally packaged into those securities no longer exist, and hell, a fair number of those houses probably no longer exist. Yes, there's a huge supply of housing once again, and real estate is doing well across the country. But mortgages represent specific financial obligations, made in specific slices of time, between specific parties. The mortgages themselves are not fungible, and never could have been. They were bundled into individualized tranches, whose bases have probably evaporated by now. (We must keep in mind that the troublesome MBSes circa 2007-8 comprised subprime mortgages, and most of those subprimes went belly up).
cremnob 13y ago
The Fed can hold them to term. They are under no pressure to sell.
- dxhdr 13y ago
  The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.
  - cremnob 13y ago
    They have choices. They have complete flexibility. They are under no pressure to do anything that isn't explicitly their goals. They want to control inflation and increase employment. If the economy starts to heat up and inflation starts to rise above their 2% target they will then have the option of selling bonds or raising the federal funds rate, the latter of which is more likely. I'm not really sure what you're trying to get at with the last comment. He doesn't know the exact number off the top of his head. The exact amount remitted last year to Treasury is $88.4 billion.
    - dxhdr 13y ago
      They are under extreme pressure to continue purchasing treasury bills from the government and mortgage backed securities and derivatives from banks. Even hinting that they'll start tapering these purchases has caused the equity markets to drop and rates to rise. Actually tapering will in short order throw the country into a recession. I'd be hard pressed to call that "complete flexibility."
  - preempalver 13y ago
    Agree, selling will be problematic. The fed's probably going to use reverse-repo to exit. See http://www.voxeu.org/article/exit-path-implications-collateral-chains http://www.voxeu.org/article/exit-path-implications-collater... and http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-the-zlbrepocollateral-scarcity-solution-weve-been-waiting-for/ http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-t...

dxhdr 13y ago

"'The Fed is the greatest hedge fund in history, ... it's generating $80 billion or $90 billion a year probably' in revenue" Can you get more asinine than that? Probably? How is this relevant when the Fed is printing $85 BILLION a month to finance ongoing bond purchases? Guys like Buffet must absolutely love the Fed because they have an outlet to offload their illiquid garbage bonds and derivatives. Imagine if you made a terrible investment that loses most of its value... you're screwed, you have no choice but to suffer, eat the losses, and move on. But wait! The government opens a shop where they'll buy your investment for close to you original principal. You're saved! Amazing. I'd write nonsense articles praising the government too.

jonnathanson 13y ago
Buffett has made a killing owning businesses that print money, invest on float, and whose risk is backstopped by the federal government. Businesses like insurance, finance, and so forth. The Fed is his bread and butter. It's his risk absorber. It makes total sense for him to keep playing this game, because he benefits so fantastically from it. Everyone else should take what he says for what it is. The agenda is pretty loud and clear.
moocowduckquack 13y ago
Illiquid bonds are only hard to spend now, but not necessarily unprofitable in the long run, especially if you can buy them cheap.
onebaddude 13y ago
>illiquid garbage bonds and derivatives. You can go to the FED site and look at all the bonds they purchased from the financial institutions. Outside of the Maiden Lane's, most of the bonds have increased in value. This was a profitable trade for the FED; liquid cash for bonds well below par.
zeckalpha 13y ago
I don't think you know anything about Buffett's investment strategies. If this is the way you think Buffett operates, you should read https://en.wikipedia.org/wiki/The_Intelligent_Investor https://en.wikipedia.org/wiki/The_Intelligent_Investor

wintersFright 13y ago

Buffet is just a shill for the USG in the confidence game of US treasuries. Sure the fed is under no pressure to sell, the pressure is really on the fed to not stop buying. QE infinity is all about hiding the fact foreigners are exiting treasuries so the fed is the last resort buyer of USG debt. Without the fed backstopping, interest rates paid by the USG on its debt would have to go up which would very quickly crash the system. Warren is just doing his patriotic duty to kick the can a little further down the road.

brazzy 13y ago
> the fact foreigners are exiting treasuries Can you back up that claim?
- dataminer 13y ago
  http://www.reuters.com/article/2013/08/16/us-usa-economy-capital-idUSBRE97F02T20130816 http://www.reuters.com/article/2013/08/16/us-usa-economy-cap...
- wintersFright 13y ago
  Actually, foreign Central Banks don't even need to dump treasuries to require QE Infinity - they can just reduce or stop absorbing the continual outflow of debt emitted by the USG. The USG has a trillion dollar+ yearly budget deficit. If central banks don't absorb that outflow of debt then either the USG reduces its spend (as if, those NSA datacentres aren't cheap), interest rates go up (USG will need will need even more debt to pay its debt) or the fed continues to buy it all up.

preempalver 13y ago

So 80Bil on 1 Trillion, ie 8% yearly return. Thats a shitty hedge fund

bananashake 13y ago
8% yearly is very good, especially for such a large portfolio with limited volatility. They have made quite a few good trades. I would not want to defend all of the fed's actions, though.
dxhdr 13y ago
It's 3.5 trillion and still rising. http://www.federalreserve.gov/releases/h41/current/ http://www.federalreserve.gov/releases/h41/current/

devx 13y ago

Can we have that full audit of the Fed yet?

yetanotherphd 13y ago

Nice clear thinking from Buffet. The ideas are very old, only the implementation is new. First, the Fed's actions are a mix of fiscal and monetary stimulus. They are not different to Keynes' idea of fiscal stimulus, since they inject money into the economy in cases where even zero interest rates couldn't. Second, in order for stimulus to work, it must convince people to make long term decisions (such as building physical factories, starting companies, buying durable goods, etc.) and therefore the Fed must commit to a long term stimulus plan. Buffet clearly outlines the Fed's approach to making this commitment. I know a lot of people on HN are deeply suspicious of mainstream macroeconomics, and that is understandable since even with my training I can't really verify that people in the field are doing things right. However, I will say that there are a large number of countries in the world that are big enough to have their independent macroeconomic policy. So far, no country I'm aware of has chosen not to use the above two principles, which together can be taken as a summary of neo-Keynsian economics. If there really some better way out there I think that some country would have tried it.

abbazabba 13y ago
You also have to consider the weight each country carries in a global economy. Everyone is tied to everyone else, and so there are bigger players and smaller players. If you are a country with an economy that does not do business with other countries (eg you do not import nor do you export), then you probably have more macroeconomic independence. So if China or Japan try to move independently, they can't, because in order to buy or sell goods to other countries, they have to buy and sell those other countries' currencies. And the business of buying or selling currencies is tied to macroeconomic policy.
- yetanotherphd 13y ago
  I was implying that when I said "countries in the world that are big enough to have their independent macroeconomic policy", but that was somewhat glossing over the issues you've raised. I'm not a macro expert, but my understanding is that a country need not be completely autonomous in order to have its own macro policy. Goods cannot flow perfectly between countries, and so macro policy will always have some effect. The more a country imports and exports, and the smaller the country, the less impact its macro policy will have. So the reserve bank of China can influence Chinese interest rates and hence have an impact on the Chinese economy. On the other hand the reserve bank of a "small open economy" cannot do much to change interest rates.

codex 13y ago

The Fed is not driven by a profit motive, but rather acts in the best interests of the people of the United States. This makes it as opposite of a hedge fund as you can get. Buffett is tongue-lashing the Fed in public because Buffet's investments won't do well if inflation hits, and he wants the Fed to reabsorb all of the money it has printed before inflation appears.

adventured 13y ago
If the Fed acted in the best interests of the American people, they wouldn't have devalued the dollar by 97% over the last century, and they wouldn't continue funding the extreme fiscal irresponsibility of the US Government (including acting as the perpetual war fund). The primary interest of the Fed is not the best interests of the American people, but rather maintaining the solvency of the US Government at any cost (including destroying the middle class via gradual and persistent currency devaluation) and providing liquidity for the global economy (given the global reserve currency belongs to the Fed in the form of the Federal Reserve Note).
- abbazabba 13y ago
  Why does it matter if the dollar is devalued? A less valuable dollar makes American goods cheaper, and foreign goods more expensive. People in other countries would rather pay for cheap American things, than something made in their home country. That money goes directly to the pockets of Americans. If the dollar is strong, then Americans will buy more goods made in other countries. So when Americans travel around, they will buy more things in those other countries. That money goes directly to the pockets of other countries. Is that in the best interest of the American people?

patrickg_zill 13y ago

If any person, non-profit, or regular corporation, ran their business the way the Federal Reserve did, they would be in jail as soon as what they were doing was public knowledge. The only reason we have this ridiculous system in place is because military force.

Steko 13y ago
I miss the good old days when monetary cranks would always come right out and talk about the Rothschilds and 'international bankers' so the average reader knew they were bonkers. Fiat money won everywhere because it outcompeted the alternatives. Fractional reserve banking too.
- patrickg_zill 13y ago
  What part of having a gun pointed at your head, is "outcompeting"?
- gpvos 13y ago
  So that means they followed the path of least resistance when they introduced it, instead of thinking it through. (Or they did think it through and it was the Rothschilds after all.) In biological evolution, the competition winner is often a more complex organism. Fiat money is more complex than the gold standard, and apparently won. But in the case of the economy, we should keep things simple enough that a large chunk of the population can still understand it. Otherwise, a small number of very specialized people will have such an information advantage that they can, and will be economically forced to, exploit all the others. I'm not saying that fiat money and fractional reserve banking are a problem, but they need to be regulated rather strongly to prevent problems.