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May 5, 2020

Breakingviews: Warren Buffett may have met his match: the Fed

by Breakingviews.

For Warren Buffett, there are inconveniences, and then there are actual challenges. Moving the annual shareholder meeting of his conglomerate Berkshire Hathaway online, and reporting a gargantuan loss because of stock market ructions are minor matters for a man with over 50 years of successful investing under his belt. The Federal Reserve’s ultra-loose monetary policy, though, could become a bigger problem.

Berkshire Hathaway booked an eye-popping $55 billion charge, one mainly attributable to publicly traded investments that include Coca-Cola and Bank of America. It’s basically a flesh wound, because what comes down may later go back up. There are exceptions, like backing four U.S. airlines, trades that Buffett said on Saturday have now been unwound. He typically advises his acolytes to look past these sorts of swings.

Even so, the pandemic could leave Buffett on the wrong side of history. There is a risk that the Fed’s response – flooding the market with liquidity and cutting rates to zero – leads to higher prices. That would be bad news for companies with future liabilities, and insurance makes up about a quarter of Berkshire Hathaway’s revenue. As Buffett has warned, the cost of repairing people, buildings and cars tends to increase faster than general inflation.

A glut of money sloshing around also diminishes the relative power of Buffett’s roughly $130 billion war chest. The longer he sits on it, even with mild inflation, the less valuable it gets. The market capitalization of the S&P 500 Index has more than doubled in the past 10 years.

Finally, there’s Buffett’s ability to snag a great deal. He has a knack for wringing good terms from businesses being shunned by scared investors. Goldman Sachs during the financial crisis is one example. Today, companies have other options, thanks to the Fed. Even Boeing, a governance disaster, just borrowed $25 billion in one of the biggest bond deals on record.

Buffett has complained on several occasions that he couldn’t find elephantine acquisitions at prices he likes. His guiding philosophy, which he repeated on Saturday, is to bet on America. The country’s own central bankers have made it all the harder for him to do so.


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