And, again, our usual caveat: macro-economics is a tough game in which few people, Charlie and I included, have demonstrated skill.
– Warren Buffett, in his annual letter.

Far be it from us to argue with the Sage of Omaha or his business partner, Charles Munger, but it seems that if Mr. Buffett ends up making money in the long run with his big bet against the dollar, it will lend credence to the suggestion that he’s an idiot savant. Certainly his success as a business manager is due partly to his ability to ignore macroeconomics.

Which is why, when Mr. Buffett pontificates on the state of the American economy, we don’t exactly fall into the amen chorus. The Buffett investment philosophy seems to be to find a company which possesses a monopoly – or near monopoly – and in which the stock price is less than the intrinsic value of the company, and then to buy that company and hold it for the rest of your life. By its very nature, this requires that one ignore business cycles and current macroeconomic trends.

On occasion, when Berkshire Hathaway missteps, it does so because Mr. Buffett has misread the trends in political economy. His self-admitted biggest mistake was a $358 million investment in US Airways. Berkshire Hathaway lost nearly all of it because, by Mr. Buffett’s own admission, he didn’t see that airline deregulation would have an impact on established carriers in the industry. Even in his annual shareholder’s letter released over the weekend, Mr. Buffett acknowledged that it was a mistake for him to stay out of the market and to choose instead to sit on a pile of $43 billion in cash during one of the best performing years in recent market histories. The Sage of Omaha failed to see what a baseball-team-owner-turned-politician from Texas figured out – that the Bush tax cuts of 2003 would lead to an economic boom.

Even when Mr. Buffett is right about economics, like he was last year about the decline of the dollar, he can be right for the wrong reasons. As the chart above shows, there’s no correlation between trade deficits and a declining dollar. The late 1970s were a time of trade surpluses and/or low deficits, and yet the dollar was very weak. It was weak because the federal government had – a few years before that – taken the country off the Bretton Woods system of a gold-exchange standard, clearing the way for excessive dollar creation. In the early 1980s, high trade deficits corresponded with a strengthening dollar as President Reagan and Paul Volcker struggled to get control of runaway inflation. The late 1990s were largely a period of growing trade deficits and a strong dollar.

In other words, there simply is no reliable correlation between trade policy and dollar value, while a reliable correlation does obtain between our central bank policies and the value of the dollar. Mr. Buffett used Keynesian reasoning to come to supply-side conclusions and stumbled into currency gains for the wrong reasons. Students of business management and value investing would be wise to study the pronouncements of Mr. Buffett, as it will sharpen their abilities to spot winning companies. However, by his own admission, and as his track record would demonstrate, his business success should cause us to place no more faith in his pronouncements on economic policy than we do on his pronouncements about abortion, say, or professional sports.

Mr. Buffett’s shareholders, many of whom have been made rich by him, may well take the same attitude. A quick perusal of Berkshire Hathaway indicates that the company did extraordinarily well immediately following the implementation of the supply side tax cuts of Reagan, which began to take hold in 1983, President Clinton, whose supply-side move came in 1997, and George W. Bush, whose supply-side tax cuts hit in 2003. While Mr. Buffett is deriding supply side economics, his shareholders are riding supply-side economics to explosive levels of wealth accumulation.