Buffett warns of 'too low' US interest rates

Warren Buffett warned of the dangers of looming inflation in front of nearly 20,000 shareholders who turned for the annual meeting of his Berkshire Hathaway company at the weekend. The world's most famous investor continued his attack on hedge funds and the current "fad" for derivatives, and confirmed he had increased his bet against the US dollar because of concerns over its record trade deficit.

Warren Buffett warned of the dangers of looming inflation in front of nearly 20,000 shareholders who turned for the annual meeting of his Berkshire Hathaway company at the weekend. The world's most famous investor continued his attack on hedge funds and the current "fad" for derivatives, and confirmed he had increased his bet against the US dollar because of concerns over its record trade deficit.

Mr Buffett took questions from shareholders for nearly six hours along with his longtime partner, Charlie Munger, at the event in Omaha, Nebraska. He said he saw evidence of things "heating up".

"Inflation is the enemy of the investor in terms of real returns," he said. The economy was growing and the Federal Reserve might be keeping interest rates too low as inflation picked up. "They've perhaps been a little slow in terms of moving up because the economy has heated up considerably," he said. "Our underlying premise is that this country will do very well and in particular it will do very well for business."

Berkshire owns dozens of businesses including the insurer GEICO, clothes maker Fruit of the Loom and the ice cream chain Dairy Queen. He told shareholders the companies that would be best suited for this environment would be ones that either had unique products and services or were less dependent on purchasing inflation sensitive goods.

On derivatives - an object of much scorn in the past because of the facility with which companies have bent their holdings to massage their quarterly results - Mr Buffett was characteristically scathing, although he did point out that Berkshire had traded in them itself and that there were appropriate ways of using and reporting them. In practice, however, they had often been used to shift figures around from quarter to quarter in a way that was plain "deceptive".

"I would predict that sometime in the next 10 years we will have some very big problems accentuated by people's activities with derivatives," he said.

He used the example of the $6bn accounting scandal at mortgage financier Freddie Mac to demonstrate the risks of derivatives. Despite having intelligent board members, being chartered by Congress, and being followed by dozens of Wall Street analysts, he said Freddie Mac could not get a hold on the complexity of these financial instruments.

There were references to "auditors selling fraudulent tax shelters" and "disgusting" mutual fund managers playing around with their clients' assets to earn higher commissions. "People are getting terrible results from consulting the experts," Mr Munger said.

Mr Buffett, the world's second richest person, responded to shareholder groups who criticised him for a taking a seat on the board of Coca-Cola because Dairy Queen and fellow Berkshire company McLane, a food distributor, did business with the soft drink company.

Mr Buffett said that while their intentions might be proper these shareholder groups, which include California pension fund Calpers, had taken too technical an approach to corporate change, "A checklist is no substitute for thinking," he said.

Mr Buffett said the larger Berkshire became, the more difficult it was to find places to park its money. The company was sitting on a stockpile of $31bn in cash at the end of 2003.

Mr Buffett, whose net worth was estimated by Forbes magazine at $43bn, reflected on some of his mistakes.

He said that by being trigger shy on buying into Wal-Mart he cost Berkshire $10bn. "If every shot was a hole in one it wouldn't make the game very interesting," he said.

"You have to hit balls in the woods a few times."