Stock market legend Warren Buffett warns: the era of cheap money is over

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• Buffett shares insights at Berkshire shareholders’ meeting
• Star investor welcomes the rescue of deposits at Silicon Valley Bank
• US economy likely to cool down in 2023

Investors always follow the Berkshire Hathaway shareholder meeting, the investment vehicle of star investor Warren Buffett, with great interest. The stock market legend, together with his business partner and confidant Charlie Munger, also answered questions from investors at the shareholder meeting in early May. Buffett revealed some interesting insights. However, the oracle of Omaha issued a warning for the US economy.

Regional banking crisis weighs on mood

One topic that is currently very present in the USA is the regional bank crisis, which has already resulted in a number of insolvencies in recent months. After the crisis began with the collapse of the bank Silvergate Capital, which specializes in cryptocurrencies, it was the difficulties of the Silicon Valley Bank, which belongs to the SVB Financial Group, that triggered panic before a full-blown financial crisis comparable to that of 2008. However, the US Federal Reserve, together with US Treasury Secretary Yellen and the US deposit insurance company FDIC, had pledged that deposits would be guaranteed – even above the $250,000 limit. This had calmed the situation on the market somewhat, even if another financial institution had to be rescued with the First Republic Bank.

At the shareholders’ meeting, Berkshire CEO Buffett praised the US government’s intervention in the SVB bankruptcy. In his view, this prevented worse things from happening and also averted the collapse of the entire financial system. As the Neue Zürcher Zeitung writes, Buffett experienced the consequences of a planned bank run, at least indirectly, when his father lost everything in 1931 in the global economic crisis at the time: “Fear is always contagious,” says Buffett, looking back at the time. Nevertheless, the star investor also criticized the current banking crisis for the fact that it could even come to this: “It just can’t happen. The communication was very bad.”

The cause of the problems in the banking sector is to a large extent in the monetary policy found by the US Federal Reserve. In an unprecedented fight against high inflation, the monetary authorities have raised the key interest rate from almost zero to more than five percent within 14 months. This is to the detriment of the fixed-income securities that numerous banks use to secure their deposits, as these become unattractive as interest rates rise.

Buffett swears investors at lower profits

But not only the banking sector is suffering from the market conditions, which have changed so drastically in such a short time. The star investor sees difficult times ahead for the US economy as a whole. So Buffett warns during the shareholder meeting: “The majority of our companies will report lower profits this year than last year.” This is due to the expected economic downturn in 2023. Berkshire itself contains holdings in many different sectors, including real estate, transportation, manufacturing, retail, services, energy and insurance, which is why the investment vehicle is seen by investors as what Business Insider puts it as a kind of “microcosm of the U.S. economy.”

However, the stock market legend also emphasizes that the companies belonging to Berkshire have performed well in recent years and have benefited from the low interest rate phase. But now the time of cheap money is over: “That time is over. The climate today is different than it was six months ago,” says Buffett.

Cash pays off

While it seems that higher interest rates are mostly negative for Berkshire, the Oracle of Omaha also cautions that the situation is quite different for the holding company’s cash reserves. Here, Berkshire would likely make $5 billion in profit this year on the back of $125 billion in cash, bonds, and other short-term investments.

Editorial office finanzen.net

– on my own behalf –

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