Watching Buffett’s BNSF All-In Wager Pay Off Despite Sluggish Economy

Fri, 10/15/2010 - 09:49

 Rail traffic has been on fire this year, which has been cited in some quarters as a sign of economic recovery. But it is one type of rail traffic that is driving growth: intermodal. Container freight shipped via rail has risen 17.3% (in September) and 17% year-to-date through August in a startling contrast to the anemic economy.

 Rails are a key economic indicator, as long as you know what is being shipped from whom to where. (Buffett, through Berkshire’s ownership of BNSF, now has a goldmine of such information.) This week the Wall Street Journal cited Buffett’s “all-in wager on the economic future of the United States” in buying BNSF and added, “he probably should have included China too…Trade volumes driven by emerging markets, and China in particular, have helped make this a pretty good year so far for rail activity…intermodal traffic is shaping up to be as lofty as ‘Mount Everest,’ CSX Chief Financial Officer Oscar Muñoz quipped at an industry conference last month.”

 An increase in inbound rail traffic is a sign of more jobs being outsourced to China. The U.S. trade deficit surged in August, with a record gap with China as the primary cause. Rail traffic is linked closely to trade flows. For example, PIERS Global Intelligence Solutions has cited one reason for the hike in intermodal rail traffic this year as demand for imported Chinese furniture created by the one-time tax credit for U.S. home-buyers. This is certainly no indicator a vibrant economy.

 Buffett has he been pounding on risks of the U.S. trade deficit for years. Some months ago, as I wrote in this Bloomberg column, he compared China’s emerging era of ascendancy to the rise of the U.S. after World War II.

 Buffett speaks most clearly through his wallet. It was patriotic to call the BNSF purchase an “all-in wager on the U.S. economy,” but rails are an all-weather winner for any number of reasons. Infrastructure assets are havens even during a deep double-dip recession, and will prosper no matter who is selling what to whom.  I’ve argued in the past the BNSF deal was actually a bearish bet, and it still looks that way to me.

 

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Fri, 10/15/2010 - 15:42 — RJ

I agree with you 100% on

I agree with you 100% on BNSF, Alice. I've got a question for you; Do you think that Buffett and Munger, both extremely intelligent, are just too compromised to make good recommendations to help our country get out of this mess? I always thought Charlie would retain that intellectual independence (and was reinforced in this belief by the parable he wrote in February), but his recent "Suck it up masses" and "You should thank TARP and it should have be bigger" have destroyed that belief for me. Warren can talk all he wants about "This country works" and "you'll be better off in ten years" but everything we've done since the crisis is diametrically opposed to what once made those lines true.

Fri, 10/15/2010 - 19:06 — aliceschroeder

Warren/Charlie

RJ,
They're coming from two different places. Charlie is as intellectually independent as I think someone reasonably can be under the circumstances and really doesn't give a damn what anyone thinks of him. However he does fit the profile of nearly every billionaire I know (with a few exceptions) meaning that he's got a streak of "libertarian/darwinian/social darwinism/I've got mine so screw the little guy/or some variation thereof." He really believes it though. A lot of people believe that "tough love" is the country's way out of our problems.

Both Warren and Charlie believe that TARP should have been bigger and that's sincere. They're modeling the 1930s, when too little government action prolonged the Depression.

Moving on to Warren, you have to watch what he does and not what he says. Warren is concerned about being popular. He's also truthful. Here is how you reconcile his truthfulness with the people-pleasing statements about how the country works and your children and grandchildren will be better off than you:

> He said BNSF was an "all-in wager on America," but he didn't say it was the only thing he was wagering on. He didn't say when he expected that bet to pay off.

> He said that America works, but he didn't say how well it works compared to other places.

> He said your children and grandchildren will live better than you, but he didn't say when. You could have said that in 1931 and it would've been true, but a whole lot of misery was endured along the way. He also didn't say how well they would live compared to the rest of the world, and whether that gap would be wider, narrower, or the same than it is today.

This is how you parse his words. You can apply this sort of reasoning to almost anything he says.

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