Warren Buffet buys Burlington Northern Railway betting on US Economic Collapse?

[Melensdad]

Warren Buffett is arguably the most successful investor in modern times so when he bought Burlington Northern a couple days ago it just felt wrong to me but I didn't know why. Reading the attached article seems to spell it out for me and now things are crystal clear. Both Buffett and I are betting against the US economy, both of us are betting that we will face inflation, both of us are diversifying away from the US Dollar.

Thoughts:

http://seekingalpha.com/article/171...chase-bearish-bet-on-the-economy?source=yahoo

Buffett's BNI Purchase: Bearish Bet on the Economy?

I apologize for how quiet it's been around here.

I wanted to hop on and discuss Warren Buffet's purchase of BNSF.

The world of course cheered the move. CNBC hyped this all day Tuesday claiming that the "animal spirits" in terms of M&A were now back on Wall St!

Ha! Yeah right....

After laughing at this headline, I spoke with a very wise bond trader following the news. His take was the same as mine: This is a huge bearish bet on both the US Economy and the US dollar versus the bullish spin you see on CNBC.

When you break it down, how could you interpret this move any other way if you had a brain in your head?

I personally think this was a brilliant move by Buffet (BRK.A) but it also scares the crap out of me. This is the LARGEST deal that Buffet has ever made with his money. He funneled a good portion of his cash holdings into this deal.

Question here:

Why would the smartest investor in the world put most of his cash into an antiquated railroad system in the 21st century?

IMO Buffet did it for a couple of reasons:

#1: Fear of inflation. As a veteran of selling commodities, I understand the cost of transportation. The cost of rail is a fraction of shipping via truck. Does Warren fear $200 oil? I sure think so after watching him place a multi billion dollar bet on the rails.

#2: Hedging against the US dollar: Warren obviously sees the same writing on the wall that the world does(as well as me). He realizes we will most likely will never pay back our $13+ trillion dollar deficit.

All you need to do is look at gold in terms of the lack of confidence in the US dollar or ANY world currencies for that matter.

The Bottom Line:

IMO, Buffet realized he needed to diversify his dollar holdings. I am sure he was scared ****less when gold rose close to $1100 this week. I am also sure every central bank feels the same way.

Treasuries are also rising as a result of the deficit lunacy. Who knows what the bond traders will do if gold continues to soar. Will yields rise in order to keep up with gold? I sure think so.

Warren Buffet basically found the perfect opportunity to diversify out of the US dollar via his rail purchase without losing face around his so called "confidence" in the US Economy.

The networks and Buffet can spin this purchase positive for the economy all they want. The reality here is this is much more of a bearish bet on the economy versus a bullish one.

Warren obviously sees higher fuel costs or a crashing dollar down the road. Why else would you spend $10's of billions on an "old school" technology that's been around since the 1800's?

Ironically, one of the worst depressions we saw in this country was the aftermath of a railroad speculative bubble in the 1870's.

How fitting is this! What comes around goes around!

I want to thank Warren Buffet for reinforcing my belief that the US economy is toast.

Author's Disclosure: No new positions but I agree with Buffet.

 

[BigAl]

I hate to say this Bob , because it will cost you money, but I hope you and Bufet are 100% wrong.
U.S. Railroads have been in the toilet for years and its a move that I do not understand . Sure they get subsidized by the US goverment but that is a healthly chuck of change to hand out for a aging railroad . Any idea how much land holdings go with it ? That may be where he sees potential to make money . I am sure he has a plan . I would need to study BNR a little more .

 

[Erik]

Al,
that's a good thought - there is a LOT of land tied to the railroad with right of ways on either side of the tracks, railyards, etc...
Plus, BNSF employs 1000 people here in Topeka alone.

 

[bczoom]

The right of ways may be a goldmine.

As new natural gas fields are tapped, the pipelines could be built in the right-of-ways for the rail. Liquified NG can be hauled on the trains themselves.

 

[Melensdad]

Well as far as betting against the economy, I actually do agree with Al that I hope I am wrong, at least to some extent I hope I am, but I don't see any evidence that I am wrong in the long term. Short term I expect that we will all see a bumpy ride no matter what is invested in, but long term (a few years) it appears to me that things are going to be somewhat bleak. I see a jobless recovery, reports are showing that business are getting 9+% greater productivity out of the current workforce. That essentially means that unless sales really climb then there will be far fewer people re-entering the employment ranks. And if the "cap & trade" bill passes then that will put the brakes on quite a few industries, especially manufacturing! And then there is the rampant spending and printing of money, both combined will have long term effects.

All of this can be reversed in time, if we have the stomach for it, but the current crop (both sides of the aisle) of politicians don't seem to want to make responsible choices. I think we have 2 years of problems, maybe more.

Now that said we have more so-called stimulus funds that will be released in the spring, that may offer some short term help, but the last round of stimulus had the economy grow by $140 B after we invested $170 B. That is, in simple terms wasteful and inefficient and if we repeat it in the spring (which is the plan) then we'll simply see more of the same!

And where are we spending stimulus money? We are buying windmills from Germany . . . engineering and assembly jobs (high wages) are earned by Germans. We get to assemble them here, but why don't we build them here? Oh, and the Cash For Clunkers that gave us a boost in auto sales, well that fiasco yielded over 50% FOREIGN car sales, and doling out $4500 per car cost the tax payers $24,000 per vehicle when it was all said and done. Talk about inefficient spending of meager tax resources. Now add to that that we are IMPORTING more food every year because we no longer produce enough to feed ourselves, and figure in the increases in energy costs that we will face, then I see the next few years as bleak. Unless someone here can show me where I am wrong.

 

[BigAl]

. Now add to that that we are IMPORTING more food every year because we no longer produce enough to feed ourselves, and figure in the increases in energy costs that we will face, then I see the next few years as bleak. Unless someone here can show me where I am wrong.

Bob , I do not think its that we can't produce the food but more of an issue that we import foods that may out of season for growing in the U.S. at certain times of the year . Fruits and veggies often are imported from South America in the winter to supply the craving of picky buyers when ours are not in season .
Look at the amount of stable foods that we export each year . Rice , Corn, Wheat ,Potatoes etc. We supply the world .
No one comes close to producing the amount of food that the US farmer does .
We can certainly feed ourselves and about half the world too . You want to see China get real excited ,just cut off the export of Rice and see what happens . WWIII would start

 

[Trakternut]

BNSF does, in fact, hold some very valuable land. Unit trains of coal bound for power plants out east go through the Dakotas every day. Much of that coal is mined on RR-owned land so they get the sale PLUS the transportation of the coal. Their land also has oil deposits and they own timber rights out west, so, the actual transportation is merely a part of the profits that can be reaped by BNSF.
However, locally, BNSF is a terrible neighbor! They are contributing to the rising costs of transportation incurred by farmers who are marketing their crops.
Small town grain elevators that could only load 5 or 10 carloads of grain in a day are gone because BNSF has ridiculously high switching charges on small lots of cars. Most of these elevators have been forced to close causing farmers to have to truck their grain further to larger shuttle train loading stations.
Elevators that have stayed open have no rail service, but hire trucks to take their grain to shuttle train facilities as well.
Shortline railroads what do still serve smaller elevators are still under the thumb of BNSF because they rely on 'em to supply them with cars and set the freight rates.
BNSF cares not one whit about the people in the towns through which their trains pass. There're rules about train speeds where they must reduce to 35 mph when passing through some towns. They had begun the process to change that to the standard 55 mph track speed in Casselton, N.D. a number of years ago. Citizens were concerned about damage to historic downtown buildings due to the excess vibrations in the ground as trains pass through. This didn't materialize, thankfully.
I wish Mr. Buffet well, but I still hate his railroad.

 

[California]

Bob, I think you are jumping right past the simplest point: Over time, fuel costs will climb and will tilt the truck/train cost effectiveness toward more train traffic. This is a bet for the out-there future, for the benefit of his shareholders and their next generation, not a short term or even intermediate term speculation.

And as everybody noted the land holdings are immense. Does BNSF now own the land-grant lands that were handed out for building the first transcontinental railroad? That was alternate square miles, in a checkerboard pattern, paralleling the line all across the country. Even after a century of developing and selling off land, that is a huge treasure. And all of it has rail access.

While short-term you and that newsletter may be correct, I think Buffet is looking farther out with this huge investment.

 

[Trakternut]

Cali, many of the landgrants out here on the Great Plains were traded for land that has timber, oil, and coal on it.

 

[Melensdad]

Bob , I do not think its that we can't produce the food but more of an issue that we import foods that may out of season for growing in the U.S. at certain times of the year...

Al, while that is ALSO true, we are a NET IMPORTER of food and have been for the last few years.

Bob, I think you are jumping right past the simplest point: Over time, fuel costs will climb and will tilt the truck/train cost effectiveness toward more train traffic. This is a bet for the out-there future, for the benefit of his shareholders and their next generation, not a short term or even intermediate term speculation.

Not missing it, actually I am betting on that! That is exactly the point of why it is BEARISH to bet on rails. When we can't afford other modes, rail becomes the most efficient, cheapest mode. You point out very clearly in your statement that as fuel cost clime that train will be cheapest. And as that is very true, it is also very true that home heating (oil in the northeast) and truck rates (nationally) will increase driving up the prices of EVERYTHING ELSE so that all prices will grow and if wages don't grow with it (and I don't see that happening in the next few years) then its going to be ugly here.