By the account of economists E.J. Antoni and Peter St Onge, the US economy has been in a recession since 2022. They explain the growing chasm between Main Street’s perception and Wall Street’s consensus as one of understated inflation. If the GDP figures take in unadjusted cumulative inflation, they would show fake growth.
When adjusted, the real GDP value points to a protracted recession, starting in Q1 2022. Similar reasoning likely led Berkshire Hathaway (NYSE:BRKa) to accumulate record amounts of cash reserves, having reached a peak of $325.2 billion in recently reported Q3 2024 earnings.
For retail investors, it is not recommended to hoard cash during recession as this amounts to missing many investing opportunities. But can retail investors glean useful insight from Warren Buffett’s latest moves?
Are Berkshire Hathaway’s Earnings Recessionary?
For the Q3 earnings period ending September, released on November 2nd, the multinational investing conglomerate reported $26.5 billion net earnings compared to a loss of $12.5 billion in the year-ago quarter. But when market distortions are excluded, Berkshire’s operating earnings actually dropped by 6% year-over-year to $10.1 billion.
Across many diversified sectors, the company gained most income from insurance, alongside manufacturing, service and retailing, both accounting for 29% income each. Insurance underwriting is close second making 17% of Berkshire’s earnings, followed by the railroad segment (BNSF) at 11%. The latter is owed to greater profitability from higher grade consumer good shipments.
For the three quarters in 2024, Berkshire’s investment income from insurance ended up 41% higher than in 2023. Given that the insurance sector is recession resistant, due to mandates and flexible rates, this is another point for the aforementioned thesis that recession has been unfolding.
When it comes to building up Buffett’s cash position (including short-term treasuries), it is up from $277 billion in Q2 to an all-time high of $325.2 billion. This is a result of exiting many profitable positions, which ended up restructuring Berkshire’s portfolio.
The Current State of Buffett’s Trades
Over the last two years (eight consecutive quarters), Berkshire has been a net seller of stocks, having spent merely $1.5 billion in new stock positions. Interestingly, the company omitted stock buybacks this quarter, which hasn’t happened since Q2 2018.
Likewise, it has been eight years since Berkshire acquired any company. Again, this aligns with the risk-off strategy one would commonly see during a recessionary period. Apple (NASDAQ:AAPL) stock was Berkshire’s major stock seller, having sold around 600 million shares during 2024.
This contracted Apple’s portfolio weight from nearly 50% by the end of 2023 to now 30%, or from $174.3 billion to approximately $69.9 billion worth of AAPL shares. Alongside Apple, Bank of America Corp (NYSE:BAC) stock was also on the chopping block, having dropped from $41.1 billion in Q2 to $31.7 billion BAC exposure in Q3.
Government Spending the Likely Culprit for Buffett’s Exits
Previously, Buffett pointed out that Apple would remain the pillar of Berkshire’s portfolio. However, he expects the federal tax rate on gains to reach new levels. This aligns with the continuous ballooning of government spending, which counts as GDP growth.
Although there is yet no sign that the government will cut spending, even the IMF in 2018 concluded that it would be preferable than to raise taxes. According to aforementioned economist E.J. Antoni, USG purchases again outpaced consumer spending growth in Q3.
The practice of including USG spending into GDP figures is also likely to induce distortions because it leads to double counting due to transfer payments. In other words, financial redistributions obfuscate the actual value of goods and services that contribute to real production and growth, eventually expressed as GDP.
Indicative Lack of Stock Buybacks
In the regulatory filing for the quarter, Berkshire Hathaway noted that stock (both BRK.A and BRK.B) buybacks are absent this time because the timing is wrong. They should resume when “the repurchase price is below Berkshire’s intrinsic value, conservatively determined.”
This means that even Warren Buffett views Berkshire stock as overvalued at the moment. Against the 52-week average of $410.81, BRK.B stock is currently priced at $442.90 per share, having tracked a 22% year-to-date growth.
Given that US presidential elections will also determine whether the emphasis will be on cutting government spending or raising taxes, investors should expect market volatility in the coming days. Unlike in other developed nations, vote counting is a protracted affair in the US.
But regardless of the election outcome, markets not only anticipate policy changes but even a preferred outcome could lead to stock sell-offs following the classic “sell the news” effect. Accordingly, investors should likely follow Buffett’s lead and adopt a wait-and-see approach.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.