The Breakdown - Why Buffett’s Bearishness Should End V-Shaped Recovery Talk

Episode Date: May 5, 2020

One month after the bankruptcy of Lehman Brothers in 2008, Warren Buffett wrote an Op-Ed saying that he was buying stocks. Yet during the Coronavirus crisis, he is sitting firmly on the sidelines.  On Saturday night, the “Oracle of Omaha” spoke for 4.5 hours in the first ever virtual version of the Berkshire Hathaway annual shareholders meeting - an event which some have called the “Woodstock of Capitalism.” On this episode, NLW examines some of the key topics of the presentation, including:  Why Berkshire sold their entire $6.5B stake in the airline industry Why they were sitting on $137B in cash  Why they haven’t made any investments  How the Fed gave companies better terms than they were willing to It was hard not to watch the presentation and conclude that Buffett feels that there are simply too many unknowns in the world going forward to feel comfortable doing much in the market right now. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by ArisX.com, the Stellar Development Foundation, and grayscale digital large-cap fund. The Breakdown is produced and distributed by CoinDesk. Here's your host, NLW. Welcome back to The Breakdown. It is Monday, May 4th, and today we are talking about Warren Buffett and the Berkshire-Hathaway Annual Shepard. shareholders meeting, which was because of COVID-19, a virtual event for the first time ever. Before we dive in, why are we talking about the Bitcoin as Rat Poison Squared guy? I think there's a few reasons. First, understanding how people who disagree think is kind of relevant if we are trying to

go out and evangelize Bitcoin. So that's part of it, but it's a smaller part. But a larger part of it is that Bitcoin operates in a macro context, at least for most of the market. Sure, there are people who are hodlers of last resort, hodlers forever, basically, who don't even care what's going on in the larger markets, but there are many holders of Bitcoin for whom the market context is relevant. And we've seen that. We've seen the correlation with parts of this market over the last few months. And when it comes to understanding that macro context, Buffett is a good barometer, especially because right now everyone in the larger markets is trying

to figure out if this is going to be a V-shaped recovery, right? A fast bounce-back, pent-up demand, that everything kind of just goes back to normal. Obviously, those who are thinking about second and third-order effects tend to not think that there's any real normal to go back to in quite the same way. But as markets really, really hope for and try to manifest and try to self-fulfilling prophecy, this V-shaped recovery into being, understanding what Buffett thinks is an interesting way to explore the possibilities there. What we're going to do is we're going to talk about the event and a few key notes from it and then maybe try to wrap it up and understand broadly where Buffett thinks we are. First, what is this event? Well, for those of you who are

not familiar, this event has been called Woodstock for Capitalist. Last year, for example, there were 40,000 people who came to Omaha for the event, leading to something like 21.3 million in business for Omaha overall, including 6.7 million for hotels. So obviously just for the city of Omaha, this is a huge economic hit to have this be a virtual event this year. Because Buffett is so influential, even people who don't hold Berkshire Hathaway stock who aren't shareholders pay attention to what goes on at this meeting. This year, Buffett answered questions for about four and a half hours, which I think is pretty impressive stamina for an 89-year-old, regardless of what you think about their particular decisions.

But either way, let's look at a few of the key facts and figures from the presentation. First, it was a bad Q1 for Berkshire, like it was for a lot of people. 49.7 billion reported loss for Berkshire. Now, interestingly, and this will be a large part of our conversation today, is the size of their cash holding. They're sitting on 137 billion in cash, which is currently one-third of their market cap. Why that is relevant, we'll talk about in just a few minutes.

First, though, let's talk about the banner headline that was reported everywhere, which has to do with their airline stake. In April, Berkshire Hathaway sold 6.5 billion in airline stocks, including all of their stakes in United, American Delta, and Southwest. Chimoth Palahapitia, who is the CEO of Social Capital, who some have called our generation's Buffett was live tweeting this and he says, Buffett dumps all airline stocks. That says something to me. If he thought it could rebound, he wouldn't have sold and possibly look to own more via converts or debt. Instead, he seems to think

it's impaired long term. This is exactly what Buffett said. He said, the airline business, and I may be wrong and I hope I'm wrong, I think it has changed in a very major way. I don't know if two or three years from now, if as many people will fly as many passenger miles as they did last year. The airline business has the problem that if the business comes back 70 or 80%, the aircraft don't disappear. This echoes Chimot's point, and we're seeing something that is a consistent thread, which is a little bit more bearishness than we would have maybe expected from Buffett. And that bearishness based on the inability to predict how certain types of behaviors are going to shift in the months and years to come. Buffett here is

basically saying that for this particular industry, one which they had a reasonably sized stake in, there's unlikely to be a immediate recovery because people will try to avoid doing the thing that the industry does. This is something that we've talked about in the context of restaurants too and theme parks and other places where you're around lots of people. These are voluntary activities in a lot of cases and people might try to avoid them because of fear of disease. So bearishness in the context of airlines, but perhaps that's not surprising, right? The travel industry feels to many, like one that's going to be the most hard hit in the long term because, not just the shutdowns, but because of consumer changes. But what other industries did Buffett talk about? Well, one,

he talked a lot about the oil and energy industry in, again, very bearish terms. He was talking about the price of oil and basically said, there's a lot of money, and this is a direct quote, there's a lot of money that has been invested that wasn't invested for $17 WTI price or West Texas International for oil. He predicts that basically there's going to be lower production because of the low price, that oil is a business that's not about one big geological hit, but is about arbitraging the likely price of oil over time, and that that's going to create downward pressure in terms of actual production. He went so far as to say that he actually supports subsidies, at least in the short term, for the oil industry. And perhaps most distrously, he pointed out that the

struggles in the energy industry, which is a huge part of American business, could actually have knock-on effects in the banking industry because of loans to energy companies that basically could squeeze the balance sheet of the banks who made those loans. So we have airlines and travel as a bearish industry. We have oil and energy, which has been dealing with the twin supply and demand shocks of what's going on in the rest of the world alongside the shutdowns, which are causing people to use less oil. And here again, we have bearishness. So we're now bearish airlines, bearish oil and energy. Real estate was another one that has potential impact to teeter over into a banking crisis. As businesses that are shut down, can't afford to pay their leases, then that

spills over into those landlords, who are commercial real estate, which spills over again into banking. Buffett actually came back to this point about the shifted supply and demand curves for a number of different types of industries. He talked about supply and demand for retail shopping space being very different than it was before. He talked about supply and demand for office space being really different than it was before. And a lot of these things are accelerating or seeing acceleration around trends that were already happening. He also talked about other small businesses in the context of newspapers and advertising declines across the board, right? If no one's buying cars, that automakers aren't advertising and so on and so forth. Effectively, I think the key point here is

that what you're starting to see is that this bearishness is not industry by industry, but is related to the interconnection between these industries and certain parts of this huge demand shock dragging lots and lots of things down. And this gets us to why I wanted to do this podcast. I think far too many of the articles and headlines that I saw about Buffett's presentation focused on his final concluding message of never betting against America. But I think the reality is so much deeper than that. And the reality is that it's very clear that this is a man who is usually jubilant and usually optimistic and usually leverages his positions and the size of his assets to take advantages of downturns who is sitting on the sidelines in a big way. And that's the

story. One person who did get it was Andrew Ross Sorkin, who wrote, his words often betrayed a deep sense of concern about the immediate future. And more than his words, he spoke with his wallet. He usually relishes a downstock market to take advantage of lower prices. Not this time. Buffett said, We have not done anything because we don't see anything that attractive to do. This is really important to put in context. First, this is a person, and this is, again, Sorkin points this out,

that said every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. So that's Buffett's general position. is a big kind of buy-the-dip, take advantage when there's blood in the straits kind of mentality. Let's bring this up to something real. A month after Lemon Brothers went bankrupt in 2008, he wrote an op-ed where he said he was buying stocks. Now he's sitting on cash and actually said, our cash position isn't all that huge when you think about worst-case possibilities.

We don't prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. You can bet on America, but you kind of have to be careful about how you bet. Christopher Cole, who is a volatility trader and the CIO at Artemis Capital, put it pretty simply. He tweeted, never seen Buffett this bearish before. Now, if Buffett is so much more bearish than people might have expected, the key question is why.

And really, the important thing is not that he was reading some special numbers that only he had access to about the virus or anything like that. It's that he is living in the reality of unknown unknowns. His basic position is that we simply do not know what might happen next. He said specifically, I don't believe anyone knows what the market is going to do tomorrow next week, next month, next year. Even more, though, it's not just the market. It's what this virus is going to do, how it's going to interplay with government regulation, whether we're going to deal with a second wave, whether we're going to deal with rolling lockdowns for years until we have a vaccine. There are all of these unknown unknowns that create an incredible difficulty in actually

knowing what to do. And that's why he's sitting on $137 billion in cash and not taking advantage of cheaper prices to dive in. Support for this podcast and this message come from Eris X. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed U.S.-based exchange. ArisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at erisX.com slash consensus. This episode is also sponsored by the Stellar Foundation. The Stellar Network connects your business to the global financial infrastructure, whether you're looking to power a payment application or issue digital assets like

stable coins or digital dollars. Stellar is easy to learn and fast to implement. Start your journey today at Stellar.org slash coin desk. Our final sponsor is Grayscale Digital Large Cap Fund. In times like these, diversification is key. Consider gray scale digital large cap fund. ticker symbol GDLC. It's the only publicly treated investment product that offers diversified exposure to large cap digital currencies, all from your brokerage account. For more information, visit grayscale.co

slash coin desk. That's g-r-a-y-scale.co slash coin desk. Now one more quick point, something that I thought was extremely interesting from the conversation. Buffett is a champion of Fed action and the speed with which they got involved. to try to write the economy. It was very clear from his comments. He was very laudatory of Jerome Powell. But at the same time, you can tell that there are some questions that he has about the implications of such aggressive quantitative easing, money printing, pick your term. He said, it's probably the most interesting question I've ever seen, the most interesting economic question I've ever seen. Can you keep doing what we're doing? We've been doing it for a dozen years, but we're testing it with a lot

more force than we've ever tested. We're doing things and don't really know the consequences. That was all about the degree of intervention from the Fed into markets. Now, this wasn't the only interesting note about the Fed intervention that came out of this. Danielle DeMartino Booth, who was here last week, quoted this on Twitter. She said, Buffett said, there was a period right before the Fed acted where we were starting to get calls. They weren't attractive calls. After Fed acted, a number of firms, were able to get money in the public market, frankly, at terms we wouldn't have given. Basically, what Buffett is saying is an affirmation of what Pomp said on this podcast a few weeks

ago. It wasn't that companies weren't going out to raise the money that they needed. It's that they thought the government was the dumbest guy in the room. Companies came to Berkshire Hathaway, came to Buffett asking for money on terms that Berkshire Hathaway wouldn't have done, didn't do, and then got money on those terms from the government. This is why Danielle's, Booth wrote in this tweet, the Fed is killing capitalism. This is the great concern that it becomes easier,

becomes more advantageous to becomes incentivized to focus on, as Mark Yusko put it on this podcast as well a few weeks ago, your relationship with whatever the current administration is. It is a smarter, savier thing to do in times of crisis than just building a resilient business in the first place.

So what's all to make of this? One, I think that it should be sobering for people who are still holding out hope for this V-shaped recovery idea, that such an unflappable optimist like Buffett and someone who is so used to taking advantage of crisis like Buffett is nervous, is sitting on cash, is parking his money outside the markets right now. That tells you a huge amount. Second, I think that this affirmation of the notion that the Fed's involvement in markets is effectively hampering the free flow of capitalism in some ways, should also be noted. But three, I think the real key notion here is that there's just no normal

that we're going back to. The economist actually wrote a piece about the new normal or the no normal, and they called it the 90% economy. And in their estimation, the 90% economy, which is the economy that comes next has three features. It's fragile, which has to do with the fact that the prospect of future lockdowns means less long-term planning and less long-term planning means less investment in the future. So it is a more fragile economy. Second, it is less innovative. Now, their argument is that basically innovation happens when people are able to interact with each other face to face. And I think you could maybe debate that, but here we are. 90% economy first is fragile. Second is less innovative. And third, which is much harder debate is it is more unfair.

We've seen studies showing that people who are making under 20K a year are 2x as likely to lose their jobs as above 80K. And it's just very hard not to understand or see how the industry is being most impacted by this right now, being most impacted by the shutdowns, run along socioeconomic lines, class lines. It's why there's this new class tinge to the questions of when to open back up. The point of all of this is that it may be that in certain parts of the country we are opening up. And it may be that in certain parts of the country, we're actually flattening the curve and beating back the virus from its worst possibilities. But there are still huge, huge structural questions that are going to last so long beyond this initial first wave of coronavirus that the biggest,

best-known, most respected investors in the world are taking seriously. So if anything, the idea of some V-shaped recovery just because the markets are going up, I think should be tampered down a little bit by this. Anyways, guys, that's it for today. Like I said, I wanted to give you a little recap of what is a hugely important and influential event for a variety of different types of investors. Let me know what you think. Hit me up on Twitter at NLW. And until tomorrow, be safe and take care of each other. Peace.