Buffett Turns Gloomy: The “Incredible Period” For The US Economy Is Coming To An End

Warren Buffett’s usual optimistic insights on the economy, which often surface in self-serving op-eds in the New York Times or CNBC vignettes, tend to coincide with times of peak pessimism.

However, during Berkshire Hathaway’s annual general meeting in Omaha, Nebraska on Saturday, the billionaire investor had a more downbeat prediction for his own businesses and the broader economy. Despite Berkshire’s almost 13% gain in operating earnings to $8.07 billion for the first quarter, Buffett expects earnings to fall at most of the conglomerate’s operations this year as the impending economic downturn slows corporate activity. He stated that during the last six months, the US economy’s “incredible period” has been coming to an end.

Berkshire Hathaway’s expansive range of businesses, including railroad, electric utilities, and retail, makes it a proxy for economic health, according to Bloomberg. Warren Buffett, the company’s CEO, has attributed its success to the incredible growth of the US economy.

However, he predicts a slowdown at Berkshire’s firms as upheaval at regional banks threatens to curtail lending due to inflation and higher rates. Buffett’s long-time business partner, Charlie Munger, agrees that the economic environment will make it harder for value investors to find stocks that look cheap compared to intrinsic value.

Despite the general pessimism, Buffett expects earnings at the insurance underwriting operations, which are less correlated to business activity, to improve this year. Geico, Berkshire’s auto-insurer, posted $703 million in earnings, helping the insurance underwriting businesses deliver $911 million in profit compared to $167 million a year earlier.

Although Geico has faced pressure from rivals, it swung to profitability following six quarters of losses, contributing to the earnings boost. However, Geico’s top-line growth of less than 1% in the quarter “significantly lags peers,” according to CFRA analyst Cathy Seifert.

I suspect rate hikes being put through to offset claim cost inflation is being met with policy cancellations,” she said. “While the loss of unprofitable policies is not always a bad thing- that’s not usually the policies — and policyholders — that leave.”

While some parts of Berkshire Hathaway saw a decline in earnings, such as Berkshire Hathaway Energy which experienced a 46.3% drop in after-tax earnings due to lower earnings from regulated utilities, energy businesses, and real estate brokerage businesses, Brooks Running Co. remained optimistic.

CEO Jim Weber expressed scepticism about a significant consumer downturn, despite weaker-than-expected railroad results caused by a fall in freight volumes and higher operating expenses, according to Edward Jones analyst Jim Shanahan.

“With unemployment being so low, it’s hard to be believing we’re going to fall off a cliff into a recession at the consumer level,” Weber said in an interview on Friday ahead of the meeting. “I wonder if this is going to be an asset-value recession.”

Succession planning 

In 2021, Warren Buffett announced Greg Abel, who serves as the vice chair for non-insurance operations, as his heir apparent. Since then, Abel has taken on a more prominent role within Berkshire Hathaway. During the annual general meeting in Omaha on Saturday, Buffett reiterated his full confidence in Abel as his successor and indicated a smooth and uninterrupted transition. He stated that Abel understands capital allocation as well as he does and will make decisions in line with the same framework that has been established over the past 30 years. “That’s lucky for us,” said Buffett.

Occidental control:

An analyst described it as the most significant announcement of the day: Berkshire Hathaway will not pursue full control of Occidental Petroleum Corp., the energy company it has been increasing its bets on for several months. This statement from Buffett helped dampen speculation that Berkshire was looking to take over Occidental after receiving approval from US regulators in 2020 to purchase up to 50% of the company. While Buffett did not rule out the possibility of acquiring more shares in the Houston-based firm, he mentioned that the company may or may not pursue further purchases.

Banking Turmoil

Buffett and Munger anticipated questions about the recent banking turmoil, bringing placards with accounting classifications featured during the upheaval. One placard read “available for sale,” and the other read “held to maturity.” While making light of the situation, Buffett also criticized the executives in charge of the failed banks, saying they should be held responsible for mistakes that were obvious. He also noted issues with incentives in banking regulation, as well as poor messaging by regulators, politicians, and the media to the American public about the upheaval. Buffett cited the example of First Republic Bank, an insolvent bank acquired by JPMorgan, which collapsed after offering jumbo, non-government-backed mortgages at fixed rates that were interest-only for 10 years in some cases. Buffett called the proposition “crazy” and noted that “the world ignored it ’til it blew up.”

Debt Ceiling

Buffett expressed confidence that Washington would not allow the US to default on its debt, a situation that could cause chaos in the financial system, as lawmakers work to resolve the impasse over the US debt ceiling. The possibility of the US government crashing into its statutory debt ceiling and facing a catastrophic technical default has been a major concern for investors and politicians. Nonetheless, Buffett remains a firm believer in America’s potential, calling it an “incredible society” with “everything going for us.” Even if given the option, he said he would still choose to be born in the US.

Geopolitics, Taiwan

During the fourth quarter, Buffett decreased his shares in Taiwan Semiconductor, which had previously alarmed investors due to its sudden reversal. On Saturday, he praised the company as one of the most important and best-managed in the world but cited his discomfort with its location in Taiwan amidst increasing tensions with China. Buffett and Munger highlighted the significance of smooth relations between the US and China, encouraging increased trade. Although the two nations will remain competitive, Buffett stated that they must always assess how far they can push each other without eliciting a negative response.

Berkshire increased its cash reserve, ending the quarter with $130.6 billion, up from $128.6 billion at year-end. As a result, Berkshire is expected to benefit from interest income as the Federal Reserve continues to raise rates. Buffett confirmed this during the annual meeting, stating that “our investment income is going to be a lot larger this year than last year, and that’s built-in.”

The company was also a net seller of equities for the second quarter in a row, pocketing $10.4 billion in net stock sales ($13.3 billion gross) after deducting purchases of $2.9 billion.

In the face of volatile markets that presented fewer of the large-scale deals Berkshire Hathaway is known for, the company increased its buyback of stock to $4.4 billion, up from the same period last year. As valuations in public markets have made it more difficult for Buffett to identify promising acquisitions, Berkshire has increasingly turned to buybacks as an alternative strategy.

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