Cash remains king at Berkshire Hathaway. The company had $125 billion of it at the end of 2019, $101 billion of it in the form of U.S. Treasury bills. This has many investors scratching their heads over a perceived lack of opportunity. It also has fund managers like Bill Ackman piling into Berkshire Hathaway stock.
What’s Going On With Warren Buffett?
In previous crises, like 2008, Buffett was able to profit because asset values fell, and cash became precious.
In the coronavirus pandemic, however, the Federal Reserve boosted the money supply, replacing the lost assets. Its intent was to keep demand flowing even while workers stayed at home.
But demand isn’t flowing. Gross domestic product fell at an annual rate of 4.8% during the first quarter. The personal savings rate rose to 9.6%. The initial forecast for the second quarter is for a retreat of 12.1%. It could be as much as 17.6%.
With demand so low, assets are now overvalued. There are no bargains for Buffett to scoop up. He’s as stuck as any hunkered-down technology worker.
What Should Happen?
Like everyone else, Warren Buffett was forced to hold his annual meeting virtually. What’s usually a party in Omaha was just Buffett being interviewed, a Coca-Cola (NYSE:KO) by his side.
The key moment came in answer to a question by actor Bill Murray. Murray pointed to the heroic sacrifices being made by essential workers in healthcare, the food chain and community services. He asked what should be done.
Buffett agreed with the premise. He then suggested that a country with $60,000 of GDP per capita can do better. We should ensure “that anybody that worked 40 hours a week can have a decent life without a second job and with a couple of kids.” He added, “It isn’t going to hurt the country’s growth, and it’s overdue.”
The economic imbalance right now is a lack of demand. Advocates for a universal income aren’t just morally right. They are right on the economics.
Until there’s demand for what the economy is supplying, economic activity will keep falling. This is precisely what happened during the Great Depression. The result then was deflation. The Federal Reserve’s moves have prevented that by propping up asset values. The question is what happens when demand recovers.
Panic Is Yet to Come
The most undervalued stocks are insurers, like Berkshire Hathaway itself, whose operating profits actually rose from a year ago. The problem at Berkshire Hathaway lies with its investments, companies whose values fell $55 billion, a huge paper loss.
The report covered the period through March. Many investment losses were recouped in April. But all that is paper. What Berkshire, and Warren Buffett, are still waiting on is an increase in economic activity.
The Bottom Line on Berkshire Hathaway
In addition to insurers, Berkshire Hathaway owns a bunch of companies, some of which may not come back from the pandemic.
Newspapers, clothing companies, producers of construction material and See’s Candies are all hurt by the crisis. They can’t even begin to recover until economic demand returns. Demand won’t return until consumers have cash.
The real crisis is yet to come. Assets are overvalued. Merchandise is rotting on wharves and can’t be sold. It’s when those operations are marked down, as Berkshire has marked down its own operations, that the economic crisis will come.
Meanwhile, Warren Buffett will sit on his cash, and I will sit on mine, too.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in WFC.