What a volatile week in the markets! Much ado was made this week about a section of the yield curve (2’s/10’s) inverting, which has historically preceded recessions. The calls for recession are worth paying attention to but may turn out to be premature. We wrote a Global Glimpse in April about inverted yield curves and how to think about them.
Without rehashing the piece too much, here are the important takeaways:
Inverted yield curves are an effect of a slowing economy, not the cause of it.
Recessions tend to lag yield curve inversions by at least a year or two.
Stock markets have historically done well AFTER 2’s/10’s yield curve inversions.
Following the last 5 inversions of the 2’s/10’s in the past 40 years, stocks were positive every time after one year and 80% of the time after two years.
This MarketWatch article has some additional data on yield curve inversions:
From there we move to a brief overview of Berkshire Hathaway’s ever-growing cash pile and stock portfolio.
Berkshire has over $122b in cash sitting idle, waiting to be deployed. Buffett isn’t a fan of cash and is certainly itching to put it to work. We see substantially increased buybacks as the likely path to put that capital to work. We’re also close to the valuation level (~1.2x book value) at which Buffett has said that he would buy back almost limitless amounts of Berkshire stock which should support the share price going forward.
Apart from the growing cash pile, Berkshire also has a hefty stock portfolio. CNBC has a cool Berkshire portfolio tracking tool which gives an approximate real-time value for the publicly traded stocks owned by the company. As you can see, the current value of the Berkshire stock portfolio is a little over $200b.
If you add up the “see through” assets like cash and stocks (that have a marketable, real-time value) you come up with over $320b. With a market cap of $485b, that means Berkshire shareholders are only “paying” ~$165b for the wholly-owned businesses like Burlington Northern Santa Fe, Precision Castparts, Lubrizol, NetJets, Geico, Dairy Queen, Shaw Flooring, Clayton Homes, See’s Candies, etc. While that’s a very simplified view of the company, we think that’s a bargain for such a stable, well-managed set of assets kicking off $5-10b per quarter of free cash flow.
As Morningstar analyst and full-time Berkshire tracker, Greg Warren recently put it in a note: “The stock’s the cheapest we can remember seeing in a number of years.”
We finish this week with a New York Times article discussing how America’s tech giants are positioning themselves to avoid heavy-handed antitrust regulations.
Corporations like Google, Facebook, Amazon and Qualcomm, not the federal government, are now at the forefront of technology. National defense is increasingly digital and linked to technologies like AI, 5G and machine learning, which are being pioneered in Silicon Valley. So while there are legitimate antitrust concerns surrounding these firms’ dominance, is it really wise to break them up from a national security perspective if that means ceding the lead in these technologies to China (whose technology champions will certainly not be broken up for this very reason)? It’s an interesting, complicated question without a clear answer.
Recent moves by the titans of Silicon Valley like the ones highlighted in the article lead one to think they will continue emphasizing the “you want us on that wall” defense.