Warren Buffett's big bet and more...

Jun 16, 2008

In this issue:
» Saudis to raise oil production - react to rising oil prices
» Nestle blames developing world for high food prices
» Buffett's unusual long-term bet
» India's path to sustainable growth
» ...and more!

The Saudis are nervous, after all!
In what would bring some sort of respite for oil consumers, Saudi Arabia - the world's biggest oil exporter and the OPEC's most powerful member - is planning to increase its output next month. The plan is to raise oil production by 500,000 barrels per day. This is expected to bring Saudi output to a production level of 10 million barrels per day (mbpd) that will be its highest ever. As reported by the International Herald Tribune, the kingdom has already increased oil output by 300,000 bpd over last month's production. This is 'a sign that the Saudis are becoming increasingly nervous about both the political and economic effect of high oil prices'.

As a matter of fact, crude oil prices have gained almost 40% since January this year, with a barrel's (159 litres or 42 gallons) cost increasing from US$ 96 to US$ 135 currently. This has led to widespread protests in countries ranging from those in South Asia to Eastern Europe and South America. The spectre of inflation induced by such a rise in fuel prices has also had an impact on the 'borrow-to-spend' kind American consumers, who have been gradually cutting back on their consumption spending. Signs of nervousness all around!

  • Also read - Believe it or not - Americans are cutting back!

    In the meanwhile...
    Prospects of increase in production by the Saudis led to oil prices falling last Friday (June 13), with a barrel's cost declining by almost US$ 2 to settle just under US$ 135 on the New York Mercantile Exchange. Gold prices are currently trading up by US$ 4 per ounce over its Friday close of US$ 871. Further, Reuters has reported that US stocks are set for a positive opening today following modest gains in European shares and ahead of second quarter results of Lehman Brothers, the investment bank. Indian markets mirrored gains in its Asian peers, and closed nearly 1.5% up. The rupee followed suit.

    Buffett's 'bet' of a different kind
    "Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?" runs a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protege Partners LLC, a New York City money management firm. This has been reported by CNN's financial website. Incidentally, Protege runs funds of hedge funds, i.e., its existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers!

  • Also read - Buffett says 'think small'

    This bet has indeed been in existence since the 1st of January this year and is between Buffett (not his company Berkshire) and Protege (the firm and not its funds). What is however more interesting is that there is serious money at stake. As reported, each side has put up US$ 320,000 (for a total bet of US$ 640,000), which has been utilised to buy a zero-coupon Treasury bond that will be worth US$ 1 m at the bet's conclusion. That US$ 1 m will then go to charity identified by the respective betting sides. Now, do we need to say which party is taking which side?

    Food major blames developing world...
    Bloomberg quotes the world's biggest food company Nestle SA that Asian governments should scrap food subsidies because they are causing price increases and heightening a global supply crisis. The company's chairman has said that 'food subsidies have been the most important distorting aspect there is. It distorts the free market and therefore it has a negative impact on the availability of food. I am absolutely against food subsidies'. He was possibly aiming his remarks at policymakers in countries like India and Indonesia, where price controls (subsidies) on basic commodities such as food and fuel have long been policy tools aimed to benefit large populations living in poverty by keeping inflation under control.

    As a matter of fact, food costs have set record highs this year, thereby triggering protests and fanning inflation around the world. Central banks, including India's, are already shifting toward tighter monetary policy and some governments are contemplating lower taxes to compensate.

    Along with the surging price of oil, higher food prices and worldwide shortage of water are factors that will keep policymakers and the human race on tenterhooks in times to come, if we are not able to find solutions to ease off these pressures.

    Inflation menace continues in India...
    The Reserve Bank of India (RBI), India's central bank, will hate to hear this. But as reported by the government late last week, inflation in the country is rising precariously closer to the double digit mark. The government's statistical department has reported that inflation (as measured by the wholesale price index - WPI) jumped to 8.75% levels for the week ended May 31, from 8.24% levels in the previous week.

  • Also read - What's worrying the Indian economy?

    While the RBI's recent move to hike the repo rate (rate at which it lends short term money to banks) to 8% will still take time to have the desired effect on containing inflation (if it does have an effect!), the fact that rising prices shall continue to pose a headache for policymakers cannot be denied. As a matter of fact, India's inflation is currently at its highest levels since the beginning of this decade (2001) and has reached the current levels on the back of rising prices of food and fuel. Now, with the RBI slated to meet for its quarterly review of the monetary policy on July 29, expectations are rife that Dr. Reddy (the RBI Governor) shall take further steps to halt the monster's (inflation) upward march. The government's latest steps of raising export duty on iron ore and steel bars to boost domestic supplies and increasing taxes on large cars to cut fuel demand are also to be seen in this light.

    Path to sustainable growth
    Slowdown or no slowdown, record spending on infrastructure will continue in emerging economies, reports The Economist, with a special mention of the BRIC economies (Brazil, Russia, India and China). This will help the countries sustain rapid growth. As reported, emerging economies are likely to spend an estimated US$ 1.2 trillion on roads, railways, electricity, telecommunications and other projects in 2008. This will be equivalent to 6% of their combined GDPs and twice the average infrastructure-investment ratio in developed economies.

    With respect to India, the report talks about the government's eleventh five-year plan (2007-2012) of spending nearly US$ 500 bn in infrastructure projects. Whether this is achievable is highly question, given the government's deficit and lack of will that has impaired the country's all round development for so many years in the past. As a matter of fact, the World Bank estimates that a 1% increase in a country's infrastructure stock is associated with a 1% increase in the level of GDP. This can be true for India as well, but only if...

    Today's investing mantra
    "Take a simple idea and take it seriously." - Charlie Munger, Co-chairman, Berkshire Hathaway

  • Also read - Lessons from Munger's colleague, Warren Buffett

  • Today's Premium Edition.

    Recent Articles

    All Good Things Come to an End... April 8, 2020
    Why your favourite e-letter won't reach you every week day.
    A Safe Stock to Lockdown Now April 2, 2020
    The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
    One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
    A stock with strong moat is currently trading near 5-year lows.
    Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
    This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

    Equitymaster requests your view! Post a comment on "Warren Buffett's big bet and more...". Click here!