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Buffett: US Fed greatest hedge fund in history

The greatest living investor, Warren Buffett, chairman of Investment conglomerate Berkshire Hathaway, has called the US Federal Reserve the greatest hedge fund in history.

According to Bloomberg, Buffett told students at Washington’s Georgetown University that the central bank was probably generating US$80 to $90 billion a year in revenue for the US government, and that wasn’t the case a few years back.

The US Fed is buying US$85 billion worth of bonds each month, which has seen its balance sheet expand to more than US$3 trillion, with payments to the US Treasury Department growing accordingly. Last year the central bank remitted US$88.4 billion.

Questions have arisen over when the Fed will begin tapering its bond buying program, with chairman Ben Bernanke announcing last week that the central bank would delay cutting back bond purchases until the banks sees more signs of improvement in the US economy. Buffett says the central bank is under no pressure whatsoever to deleverage, so it can pick its time. Last week Bernanke said he wanted to see further gains in US employment before scaling back quantitative easing.

Buffett also said that he thinks Bernanke is mildly disappointed in the rate of improvement in the economy over the past few years, and wants Bernanke to stay on as the Fed chairman. “If you’ve got a .400 hitter in the lineup, you don’t take him out,” he said, referring to a high batting average in baseball. “I don’t have a second choice. I don’t know Janet Yellen at all.”

Bernanke steered the US through the 2008 financial crisis, but his term ends in January 2014. A successor has yet to be anointed, but Fed Vice Chairman Janet Yellen is President Barack Obama’s leading candidate to replace Bernanke.

Since the lows of March 2009, the S&P ASX 200 Index (Index:^AXJO) (ASX: XJO) has risen 58%, and is at five year highs. By comparison, the US Dow Jones Industrial index has rocketed up more than 118%, in part driven by the US Federal Reserve’s policies. Markets are now nervous about when the stimulus will end, much like a drug addict going ‘cold turkey’.

Foolish takeaway

Volatility in equity markets is likely to continue, until the replacement for Bernanke is named and the tapering program begins. Foolish investors should have a watchlist of quality stocks, with any market pull back an opportunity to pick up stocks on sale.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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