No More Greed in the Midst Fear
Yopie Hidayat (Contributor)
IN financial markets, Warren Buffett’s reputation as a beacon of investment is extraordinary. If he suddenly makes an unusual move, the market will definitely pay attention. That is what happened when Berkshire Hathaway, the main firm managing Buffet’s investment, had its investment profile revealed to the public as a requirement for market transparency.
That is the rule of the game in America. Every fund management handling a total of more than US$100 million must report their investment composition every quarter to regulators, who will then make it public. The report, known as the Security Exchange Commission Form 13F, is an important source of information for investors. Information in it is becoming clues which stocks or investment instruments are being favored by the large fund management firms. Many investors use it as a reference when crafting the composition for their own investments.
That report shows, throughout Q2-2020, how Berkshire sold American financial institutions shares such as JP Morgan Chase, Wells Fargo, and Goldman Sachs totaling US$6 billion. In turn, Buffett bought US$500 million in stocks for Barrick Gold, a gold mining company.
To the market, this is an interesting surprise for two reasons. The first one is Buffett has never liked investing in gold, which he considers an unproductive lump of metal. The second reason is that Buffett has an unusual rule of thumb: be fearful when others are greedy, but be greedy when others are fearful. The purchase of Barrick Gold stocks by Berkshire has given rise to the interpretation that Buffett is also seeking safety, going into unproductive assets. Opposite to his doctrine, Buffett is no longer greedy when the market is fearful.
Indeed global financial markets have recently grown more fearful when considering the future of the US dollar. Its reputation is slowly shrinking. The dollar is undergoing a debasement—it is losing the foundation of its value because the Federal Reserve is aggressively printing dollars without limit to push the US economy that is in a slump because of the Covid-19 pandemic.
That is one reason why the price of gold lately has rocketed beyond prediction, rising 28.1 percent year to date. Slowly, many countries are looking for alternatives, reducing dependency on the dollar that still holds the throne as the world’s foreign reserve currency and the main tool for international transaction payments.
Take Russia and China for examples. For the first time in the quarter, the portion of dollar usage in Russia-China trade transactions have slipped below 50 percent, down to 46 percent to be precise. This data is from Q1-2020. Both countries are now using Euro (30 percent) and their respective currencies (24 percent). For countries that still aspire to become independent from the US, this decrease of US dollar usage can be an inspiration: overthrowing the US dollar from its throne is not an impossibility.
Even so, in the context of global trade, widespread de-dollarization will require a long time. It is not easy to just kick out the US dollar. Around 60 percent of global foreign reserves are still stored in US dollars.
The US dollar still has many unique advantages compared to other currencies. Other than under control inflation, the US economy is still the largest in the world. This is becoming a strong anchor for US dollar domination. The US financial market, which is very deep and open to global investors, is still unmatched.
The problem is, according to data from the Bank of International Settlements, the US dollar right now is overvalued compared to its real exchange rate considering the trade balance. The US dollar right now is also too expensive by 16 percent compared to the euro in terms of purchasing power parity.
The Dollar Index movement, the measure of the value of the dollar compared to the currencies of US trading partners, reflect that condition. The Dollar Index has fallen 10 percent since March. Small wonder that Buffett has modified his investment formula. There is no shame in worrying once in a while when the market is shaking in fear.