A legendary investor is now betting against the U.S. and the rest of world economy.
Warren Buffet, a man presiding over a $714 billion fortune of Berkshire Hathaway, is holding cash because he finds nothing to buy -- after raising his wealth 26.8% last year.
Many people will find Buffet’s market pessimism hard to take after the S&P 500 staged a breathtaking 2.24% rally last Friday. Wall Street simply ignored appalling news of accelerating inflation, an already announced credit tightening and a near certainty of an unknowable length and amplitude of the coming growth recession.
And there was worse. Bombs and missiles were raining in on Central Europe as part of an apparently irreconcilable military confrontation to determine the new world order – at the risk of ending the humanity.
Most probably, Buffet would readily dismiss that one-day Wall Street euphoria as a celebration of an unthinking crowd. He is holding cash because he knows the price of taming a five-fold increase of the U.S. consumer price inflation over the past year. And he also knows how difficult it is to extract a lasting value from stock market investments.
Waiting for rock-bottom bargains?
Over the last five years, for example, Berkshire Hathaway’s valuation fell 3.3% short of the increase marked, during the same period, by the S&P 500. And that was the time when Wall Street could confidently rely on the “Fed put,” an apparently well-established conviction that the U.S. Federal Reserve would step in to prop up its endangered financial system.
This time, however, things could be different. That’s probably why Buffet holds cash to pick up rock-bottom bargains because the accelerating inflation leaves no room for Fed’s large-scale bailouts with massive liquidity injections.
Yes, the Fed will have its hands full bailing out Uncle Sam, whose debt is currently growing at a monthly rate of $900 billion.
Wall Street will not give in lightly, though. Blackrock (an investment management company) is now telling the Fed that inflation is a structural rather than a monetary problem. So, go ahead keep the printing presses spinning and don’t worry about inflation.
Is the Fed falling for that nonsense? Maybe it is. Over the last two weeks, the Fed allowed money market rates to decline nearly 10 basis points. That could also mean that the Fed is hearing the market shout to do its interest rate increases gradually and in small steps.
Things are much more complicated in the euro area.
The war in Ukraine has aggravated an already serious energy crisis. That will further accelerate the euro area’s energy-driven inflation in the coming months. On top of that, sweeping sanctions on trade and financial relations with Russia will deal a sharp blow to economic activity in most euro area countries that are still struggling with the depressive impact of a raging pandemic.
How the euro area inflation will evolve depends on whether, and how soon, the hostilities in Ukraine will be settled. At this writing, prospects for a negotiated truce and a lasting peace look as remote as ever.
Europe’s huge energy crisis
That unfortunately opens the possibility for the most extreme and damaging developments if Russia were to limit, or suspend, energy supplies in response to EU’s increasingly radical limitations to trade, finance and transport relations.
In any event, Russia-EU ties have been gravely set back. As things now stand, it is difficult to see how they can be improved in the foreseeable future. And that, of course, means that the EU will have great difficulties in managing inflation and economic growth with alternative energy supplies from inadequate and much more expensive sources.
A seriously unbalanced euro area policy mix is another difficulty. The fiscal policy is overextended. None of the major euro area economies – including Germany – comes even close to meeting debt and budget rules. The area’s public debt of 120% of GDP is double of what it should be, and so are budget deficits in France, Italy and Spain.
Under those circumstances, the burden of economic stabilization will have to be entirely borne by the monetary policy.
A tall order, indeed. The ECB will have to tolerate rising inflation. Its earlier scenario of easing inflation pressures induced by falling energy prices is clearly out of reach.
The U.S. could do much better – if the White House were to release its ample energy supplies. Falling energy prices would immediately slow down inflation and relieve upward price pressures on a broad range of consumer products and services.
That would make it easier for the Fed to stabilize prices while maintaining moderate growth and employment creation.
Warren Buffet – reportedly a Democrat – knows all that. Why is he not telling that to the White House, instead of betting against America?