The Thinking Chair

The other day I sat down and listened to a series of questions being posed to the great investor, Warren Buffett. He is a wonderfully colourful character, full of the slightly hokey wisdom that you would expect from a man from Omaha, Nebraska. And he plays the part to the full. He really gets you thinking.

Buffett's annual letter to the shareholders of his investment company, Berkshire Hathaway, is always worth studying. He fills it with broad brush analysis of his businesses and general comments on the world as he sees it. He has been pretty successful over the years amassing a personal fortune in excess of $50 Billion and Berkshire Hathaway boasts a share price of around $150,000 a share.

In this last letter he took a swipe at Wall Street and slapped the Investment Banks. Not claiming the quote for himself he wondered why " the banks have created complicated, new ways to lose money when the old ways worked perfectly well"!

He also noted that if some of these people had IQ's any lower "they'd have to be watered twice a day".

But of most importance were his comments on the real economy. Bluntly he noted that although there may be technical reasons why the US is not in recession, when a person's home has dropped in value by 20% or more, food and petrol have risen sharply and there is no pay raise in sight then, my friend, you are in a recession.

So, are 3,600 miles of Atlantic Ocean enough to keep this state of affairs from our doors?

Buffet doesn't specifically address this but he does make a very important observation. We are experiencing a global phenomenon that is wooing us again with its "new paradigm" siren call. Driven by the growth in the Middle and Far East, the story goes, Commodity prices can only go one way. Up.

Beware, says Buffett. There is always a fool looking to be parted from his money. As investors around the globe chase the type of returns on their money they have had for the last few years, so money has poured into Metals, Agricultural Products, Oil, Gold in fact anything that this never ending demand from the developing countries. Many of these commodities are now heavily overpriced according to historic valuations. A correction here it can be argued, is overdue.

As Buffett himself might say, with institutions chasing liquidity by offering juicy savings rates, cash looks a pretty good place to be right now.