When Even Warren Buffett Is Clueless

04 May, 2020

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You can bet on America, says Warren Buffett, before admitting that even he does not know what comes next. The phrase that defined this years’ Berkshire Hathaway shareholder meeting was ‘I don’t know’.

One of the world’s wealthiest self-made men and a celebrated source of de-hyped advice and common sense, Mr Buffett seems at a loss to explain the present moment and detect a future trend. In his folksy style, the billionaire investor on Saturday revealed that Berkshire Hathaway had exited the airline industry, selling its entire stake in American Airlines, Southwest, United, and Delta.

In this morning’s pre-market trading, the move caused a mini stampede for the exit with shares in US airlines dropping almost 10 percent, pushing the Dow Jones Industrial Average futures down by 1.2 percent.

Returning to the sector in 2016, Mr Buffett caused surprise and disbelief amongst his followers by acquiring 10 percent stakes in the four largest US carriers. Just nine years earlier he had vowed never to invest in airlines again after a major bet on US Airways went sour. Visibly annoyed with his misstep, Mr Buffett remarked in 2007: “If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a great favour by shooting Orville [Wright] down.” Likening the airline industry to a bottomless pit, Mr Buffett deplored its ‘insatiable’ demand for capital and the volatile nature of the flying business. Berkshire Hathaway used most of the proceeds from its sale of airline stock, some $6.5 billion, to buy Treasury bills.

Now over his dalliance with airlines, Mr Buffett tried very hard to put on a brave face as he chatted online with Berkshire Hathaway shareholders. Whilst he peppered his talk with tired one-liners – ‘Nothing can basically stop America’ – what reverberated most were his ‘I-don’t-knows’. Investors’ spirits briefly rose when Mr Buffett assured them that markets would improve over the long term, only to dash all hope for a speedy recovery in the very next sentence by reminding participants that it took the stock market 22 years to reclaim the ground lost in the crash of 1929.

Offering neither pessimism nor optimism, Mr Buffett instead projected a sense of realism and let his wallet do most of the talking. Contrary to previous crises, Berkshire Hathaway is not snapping up undervalued or distressed companies for the proverbial song and dance. The company keeps a tight lid on its cash reserves, estimated to hover around the $137 billion mark.

The dark clouds of the Corona Recession will not ‘rain gold’. Earlier, Mr Buffett attributed part of his success in amassing a fortune for himself and Berkshire Hathaway shareholders to rushing out with a ‘washtub’ to catch some of that precious water pouring down from heavens darkened by an economic downturn. Not this time around: “Our position will be to stay a Fort Knox.”

On his company’s formidable pile of ready cash, Mr Buffett said that, given worst-case possibilities, it is not ‘all that huge’: “We don’t prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum.”

Webcast by Yahoo, the 2020 Woodstock for Capitalists was an event almost as depressing as the current times. Mr Buffett is not so sure that the financial sector can hold up when the chips start falling and warned that trouble in the retail, energy, and real estate sectors may cascade down to banks before long. In a flash of brilliance, Mr Buffett noted that it seems a good time to borrow money, “which means that it may not be such a great time to lend money.”

Investors took courage from the fact that the Sage of Omaha did not spell out a scenario of doom and gloom, but merely pointed out that the market lacks direction and moves on the hunches of investors willing to ignore the ravages on the pandemic on one day and getting ‘all shook-up’ over the carnage on the next. Berkshire Hathaway reported a net loss of close to $50 billion in the first quarter of the year.

As investors considered Mr Buffett’s advice, or rather the lack of it, markets were spooked by yet another spat between Washington and Beijing after US Secretary of State Mike Pompeo suffered a momentary lapse of diplomatic reason and revealed that the Trump Administration now possesses an ‘enormous’ amount of evidence connecting the corona virus to a lab in Wuhan, China.

Appearing on ABC’s This Week, Mr Pompeo lashed out at the country and promised to hold China to account over the outbreak. The former CIA chief accused the Chinese Communist Party of orchestrating a campaign to withhold evidence, deny outside specialists access to crucial data, and silence journalists and medical professionals trying to raise alarm.

Though Mr Pompeo declined to back up his allegations with hard proof, he did recall the sudden and inexplicable closure of the Shanghai lab that published the first genome sequence of the corona virus and shared its research with the global scientific community. On 12 January, the Hong Kong-based South China Morning Post reported that the lab at the Shanghai Public Health Clinical Center was ordered closed for ‘rectification’.

However, US officials who have read the intelligence report on the origins of the novel virus as circulated by the Department of Homeland Security say in private that the evidence cited by Mr Pompeo is largely circumstantial and based on an analysis of publicly available documents. Absent a smoking gun, they fear that pressure from an administration eager to assign blame to China may distort the findings not unlike the fake intelligence reports on weapons of mass destruction that sparked the 2003 invasion of Iraq. Also, most US virologists agree that the virus shows no signs of having been man-made or genetically modified.

Bracing for a second quarter that will likely see the US economy plunge to nearly unfathomable depths, the Trump Administration is readying a third infusion of cash for the Paycheck Protection Program to add to the initial $349 billion, which was exhausted almost instantly, and the $310 billion top-up authorised by Congress early last week and that has now also been mostly accounted for. Director Larry Kudlow of the National Economic Council on Sunday said the second tranche had taken far too long to materialise and that the delay added to the misery of workers and small- and medium-sized businesses. Mr Kudlow appealed to Congress to act faster on a future third addendum to the programme.

The Small Business Administration (SBA), charged with coordinating the disbursement of the loans, has managed to funnel more money to smaller companies after the agency initially approved payouts to large publicly traded corporations, some of which have now returned the funds. Over the last two weeks, the average loan size has decreased from $206,000 to $79,000 whilst the number of applications has increased significantly.

Meanwhile, a growing number of US business owners display a disconcerting reluctance to spend the emergency cash due to the bewildering number of evolving and often ambiguous strings attached to the loans. A minimum of 75 percent of the funds must go towards the payroll and has to be spent in eight weeks. If these and a host of other conditions are met, companies may request debt forgiveness.

Many business owners feel uncomfortable paying workers to sit at home for the duration of the pandemic. They fail to grasp the actual intend of the programme: to keep staff from losing their income. Instead, entrepreneurs wish to use the loans to retool their business for the new post-corona era, confident that they can then afford to re-hire employees.

From Mr Buffett down to the mom-and-pop corner shop, nearly all economic actors are almost desperately trying to look for reassurances in a world turned upside down and shaken thoroughly. With certainties far and few between, there is cold comfort in Mr Buffett’s advice to hold on and sit tight.