Why is Warren Buffet planning for hyper inflation? Has he gone senile?

August 13, 2010

(To increase the font on this essay – hold down the Ctrl key and keep pressing +) Before taking a bite out of this in earnest – let me just declare. I am not a great fan of Warren Buffett – or for that matter anyone who claims to be a legend in his field of expertise. It’s nothing personal, it’s just business and I guess through the years it has developed into a sort of attitude – where I have always taken kudos, chupatzh and everything to do with the cult of veneration and adulation with a heavy dose of askance.

Now that I’ve qualified myself – let’s dive right in – the big news is morning is Warren Buffet is taking the contrarian view and positioning Berkshire Hathaway’s for higher inflation. Has Warren lost his marbles here? Because anyone worth his salt will tell you provisioning your fund for higher inflation these days makes as much sense of building Noah’s ark somewhere in the Gobi desert – probabilities do not make for possibilities – so what is the plot?

One way to understand Warren Buffet’s game plan is to appreciate that his investment fund operates on a 20 to 30 year time horizon – if you take that into consideration, then provisioning for inflation when there is no signs of inflation makes a whole lot of sense. Sure, the immediate risk we face is deflation, but the longer-term risk (looking beyond 2013 and beyond), without a doubt, is definitely inflation. In that regard, Buffett isn’t wrong in taking a contrarian view as he is taking the long-term view. The difference here may be subtle, but nonetheless they represent different approaches to managing risk.

The second thing about Buffets latest move is what it shows is a growing perception amongst clever money that we may already be well into the end of the simple Simon game theory – this is a theory that only less than 50 people around the world know about. So if you happen to be reading this right now, congratulations, you are the 51st! As what the end of the simple Simon game theory suggest is the age of predictability is coming to a rapid end and what we are going to see instead is a period of wild and unpredictable swings that will begin to characterize market conditions.

So when you see Warren’s latest moves against this new development and against a new system as complex as the national economy, Warren knows that when inflation comes, there is usually no warning – it creeps up on you like a thief in the night; the timing is therefore almost impossible to predict, and it could happen faster than the market currently anticipates. To exacerbate matters in a market where the only thing that is certain these days is more uncertainty – it makes perfect sense to plan for the worst case scenario.

Happy Hunting

Darkness 2010

P.S: Today I will try to finish off on the video blog


on why I believe the wheat rises on the recent fires in the Ukraine is just mumbo jumbo – hopefully this time we wouldn’t get interrrupted by irrate customers calling, crazy traffic wardens etc (by the way, I managed to weasel my way out from a ticket!)….. stay tuned to go where no mind dares to go!

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