Inflation fears should exist - Buffett speaks

(Bloomberg News) Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said low interest rates and inflation should dissuade investors from buying bonds and other holdings tied to currencies.

“They are among the most dangerous of assets,” Buffett said in an adaptation of his annual letter to shareholders that appeared today on Fortune magazine’s website. “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”

 “High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely,” Buffett wrote. “Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.”

The Oracle has spoken. There is little reason to hold fixed income in this environment. The is a timing issue. You may be able to get more out of fixed income in the short-run if there is another round of QE or if there is a slowdown of growth, but it is hard to see how fixed income could be a good investment in the long-run at current levels. Someone could point to deflation fears as a reason. You could also say that Japan was able to continue with low rates for decades, but the risk is still that purchasing power will be eroded.