Pro Perspectives 5/5/20

May 5, 2020

Warren Buffett spoke for over four hours over the weekend, as he hosted his virtual annual meeting for Berkshire Hathaway.

Although his message "bet on America" remained consistent, as it has over time, his lack of buying in this stock market decline suggests he's not comfortable betting, just yet. At least that's the signal that has been taken.

 
Is it the right signal?

Don't forget, Buffett runs the biggest hedge fund in the world, dressed up like an insurance company.  It takes premiums and invests those premiums, primarily in stocks (the value of which have been marked down with this broad market decline).  But they have been sitting on an unusually high amount of cash — $120 billion worth

Why isn’t he putting it to work?

 

A possible reason:  In this ongoing extraordinary event, the insurance business has unknown liabilities.  As an industry overall, he said "the amount of litigation that is going to be generated out of what's already happened, let alone what may happen, is going to be huge … just the cost of defending litigation will be a huge, enormous expense."

On that note, I had heard over the past of month, anecdotally, that a portfolio manager at a big insurer was forced to sit on his hands, unable to make new investments in this environment, by mandate.  I've yet to see any industry-wide regulatory policy that would spell that out, but with Berkshire's lack of action, perhaps there is truth to it.  

What's another reason Buffett hasn't swooped in with a “deal of the century,” as he did in the financial crisis?  The Fed and the U.S. Government, in this case, through quick and decisive intervention, have curtailed if not eliminated the opportunities.  They squeezed out the vultures, by becoming the lender of last resort (with the deepest pockets of them all).