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Warren Buffet is an asshole: Burlington Northern

Of all the people who rode the wave of monetary policy in the last 30 years, Buffett is the only one left who has not yet had his reputation tarnished. He annoys me the most because I see him as the most facetious and hypocritical of the bunch. ¬†So as to not dredge up old history, let’s just focus on what has happened in the last few years. And I am going to try to keep this column going as a serial.

Burlington Northern acquisition – This is Buffet’s Steve Case move. In retrospect 10 years from now it will be viewed as the deal of the century.

What Buffett says happened: He saw the chance to acquire a great company at a great price and took it.

What actually happened? : Buffett prospered during an era of low inflation and low energy prices. This allowed him to make butt loads of money in the bond market. The problem now is that Berkshire is primarily a financial services firm, heavily overweight the insurance, banking, and financial services sectors. On top of that his holdings of consumer products firms, Coca Cola and the like, make him heavily short of energy and commodities.

He’s basically looking ahead and seeing an era of high inflation and high energy prices. So he needs to convert his soon to be devalued financial portfolio into one consisting of real assets and with exposure to energy. He needs to do a big deal and to do it fast, before 2011-2012. And he needs to do it without moving the market. If word gets out he is selling, the bond market would crash, and he simply has too big a portfolio for that not to happen. So the only way he could do this, is via a “transformative deal” , as he put it.

He doesn’t want to buy a mining firm, because the beta is too high, and he would have to take on serious operational risk. He wants a stable asset.

Enter Burlington Northern, which is basically an irreplaceable asset at this point. It’s an asset valued of USD50billion, with a replacement cost running into the trillions. Can you imagine how expensive it would be to acquire the land rights and build something of that scale again? So it a definite “real” asset.

As energy prices go up, trucking, shipping and all other forms of transportation which are less energy efficient will increase in cost much more than rail transportation will. Furthermore, as oil is depleted and more coal is eventually burned in the US, Burlington will have a prime position in transporting coal from where it is mined to where it is burned.

In about 5 years, you will start hearing politicians in Ohio start screaming as coal miners get fucked over by Burlington. And companies across the US scream as they convert from container trucking to rail.

Why Buffet is an asshole: This is an AOL like deal here. He’s basically managed to trade a less valuable paper asset for a much more valuable real one. But this is only going to be evident going forward. He’s managed to put out a great story, that this is a vote of confidence in the US, when actually it is the exact opposite, it is vote that high inflation and energy prices are going to put a serious dent in US economic growth, but through this deal he would have enhanced his relative position.

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May 1, 2010 Posted by | Uncategorized | , | 6 Comments