Financial innovation in the investment business is, in our opinion, sometimes just smoke and mirrors. The recent movie The Incredible Burt Wonderstone illuminates what this smoke and mirror façade can produce. The movie portrays two magicians who have a long-running show on the Las Vegas Strip. One act of their show is much like the game of Hangman. Burt Wonderstone (played by Steve Carell) presents the trick to the audience while his side kick Anton (played by Steve Buscemi) walks up the top of the platform and prepares to put his head inside the noose. Both entertainers put cloaks on to mask their body and head. The noose is tightened for the hangman. The trapdoor of the hangman drops. Seconds later, the head covers are pulled and magically the entertainers have deceivingly traded places without the audience knowing. How magical!
We returned recently from the Berkshire Hathaway Annual Shareholder Conference. The most exciting and profound comment to us was what Warren Buffett said about the unprecedented actions the last three years by the Federal Reserve Board. Buffett was asked about the risks of the Federal Reserve’s current plan to buy Treasuries to keep interest rates very low. Buffett said he has faith in Federal Reserve Board Chairman Ben Bernanke, but did acknowledge that it will be a “shot heard round the world” as soon as it looks like the Fed’s Treasury buying plan winds down. At Smead Capital Management, we have been thinking for over one year about the ramifications of the open market setting short-term interest rates and the Federal Reserve Board beginning to reverse their “quantitative easing”. We looked closely at the winners and losers from the current policy and it brought us to today’s key question. What if Yen weakness/Dollar strength is already the “shot heard around the world” and most market participants are missing this fact?