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Though Berkshire Hathaway has tens of
billions and ample cash flow, Warren Buffett is borrowing money (and buying
stocks).
Investors do crazy things at market
extremes.
Case in point: 100-year bonds, also known as
"century bonds," are making a comeback. Via Bloomberg:
Mexico sold $1 billion worth of 100-
year bonds overseas, taking advantage of a plunge in benchmark U.S. borrowing
costs to bring back a record-long maturity it unveiled a year ago.
The government sold the bonds due 2110
to yield 5.96 percent, or 242 basis points above
30-year U.S. Treasuries, according to data compiled by Bloomberg. Mexico
first sold the securities in October, issuing $1 billion at a yield of 6.1 percent...
Would you lend to Mexico for 100 years
at a lousy 6% yield? I wouldn't. Or how about the University of Southern
California? They issued $300 million worth of century bonds at an even lower
rate, 5.25%.
The mind boggles. There is legitimate
question as to whether the entire state of California will avoid
bankruptcy -- and yet investors are willing to bet on a single university
within it, for 100 years, for just over 5 cents on the dollar.
If you are wondering "who
makes insane wagers like that," the answer is that some big players
are forced to.
Insurance companies and other large
institutions have no other choice than to put capital to work, regardless of
the environment, within the confines of committee-approved investments where
the boxes are checked off as "safe."
This need to be "fully
invested" (or close to it) is coupled with a bureaucratic lack of street
smarts. The number crunchers focus on all kinds of balance sheet data points,
but few consider the dangers of lending at rock-bottom rates, at a low point
in the cycle, for a ridiculously long period of time.
Meanwhile, the savvy Wall Street
players are not lending. They are borrowing.
Last week, the Federal Reserve
promised to keep interest rates at or near zero for another two years. The
shorthand for this is ZIRP, or zero interest rate policy. A two-year
extension of ZIRP counted as great news for the Fed's taskmasters: Big banks
and big corporations.
ZIRP gave the green light to banks to
"borrow short" and "lend long" in the government
securities market. The Fed's promise lets them leverage up on the trade.
Big corporations, meanwhile, are like
the guy with an umbrella who decides to buy another, just because they are
cheap. Companies with tens of billions in cash on the books, and plenty of
cash-yielding assets to boot, are nonetheless
borrowing money just to exploit the ZIRP environment.
Warren Buffett is doing it too.
Incredibly cash-rich entities like Berkshire Hathaway, the vehicle Buffett
controls, are borrowing just for the sake of borrowing … and other blue
chip companies are following suit. From the WSJ:
Berkshire is preparing a three-part
offering that will be benchmark in size, meaning it will be at least $500
million but may be larger depending on demand. The deal is composed of
three-year floating-rate notes and five- and 10-year fixed-rate notes.
Proceeds will be used for general corporate purposes.
Procter & Gamble also plans to use
the proceeds from its issue for general corporate purposes, which may include
paying off its 1.35% notes due Aug. 26, 2011. The benchmark two-part offering
consists of three- and five-year notes.
Meet the new market landscape, same as
the old market landscape. Ham-fisted efforts to help the broader economy,
which really means producing jobs, simply wind up funneling
the benefits to large corporations. Money has gotten ridiculously
cheap… for some, but not for all. The rich get richer.
Back to Buffett: The Oracle of Omaha calls
himself a buyer of stocks at current levels. "The lower things go, the
more I buy. We are in the business of buying," he tells Fortune.
One could see him trolling around for high-quality blue chips with plenty of
cash on the books, like Berkshire.
Speaking of cash -- and borrowing
costs -- Buffett disagrees with the S&P downgrade, but in a very telling
way. As he tells Fortune:
"U.S. Treasuries are still
triple-A in that there is no question that we will repay the interest and the
principal. Every contract will be repaid. So our bonds are triple-A. Our
currency, the dollar, is not triple-A. Our bonds are."
This is true. U.S. Treasuries will
likely always be "money good," as Wall Street puts it, because the
United States only borrows in dollars, and can always pay up via printing
press.
The dollar itself, though, is a whole
different story. Those who think the S&P downgrade was well deserved
argue that, if a credit rating is to have meaning, it should reflect currency
risk as well as repayment risk. There isn't much value in getting paid back
with confetti.
Then too,
the downgraded outlook for the currency -- which, if it had its own rating,
would be closer to triple Z than triple A -- helps explain Buffett's buying
spree. If "cash is trash," then businesses with pricing power,
recession-resistant business models and ample access to capital may be the
opposite.
Justice
Litle
Taipan
Publishing Group
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