Is the Oracle blind?

Warren Buffett likes cash. Berkshire Hathaway, the hedge fund led by the Omaha oracle, has surprisingly increased its cash reserves since the beginning of the pandemic reaching USD 150 billion. When most investors avoid cash and throw their funds into the market,  the oracle seems to ignore the investing frenzy. Is the oracle wrong? Does he not understand the market? Or, maybe he knows something we don’t...

Buffett made his reputation with his old-school approach of picking investments. The oracle is known for investing only in businesses with products he understood, showing long-term profitability. He has avoided investments in speculative and highly leveraged companies.  

The oracle’s traditional view was that robust profits generate value for investors.  It could be that Buffett cannot figure out how to deal with the current circumstances, whereas excess money supply drives the market.  However, here are five reasons why the oracle may not be wrong:

1. Greenback’s value is the main argument behind US global leadership. Thus, Washington will not sacrifice the dollar by exposing it to long-term hyperinflation.
2. Supply shortage is not sustainable and leads to inefficient markets. A sudden market contraction would create an immediate excess supply.  
3. The sanitary crisis is far from being over. The new coronavirus may very well unfold with several successive waves of infections over the next decade.
4. The stock market is overvalued, the price to earnings ratios being excessively high. Overpaying for assets that provide little returns does not make sense.
5. A market crash would wipe out many irrelevant hyperinflated stocks with little or no value-added.

Seemingly, from Buffett’s point of view, there are reasons to believe that the market will collapse, liquidity will fry up, and cash will be king again.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. [...] The best chance to deploy capital is when things are going down. Warren Buffett, CEO of Berkshire Hathaway

Market overview

The Dow Jones Industrial Index lost 2.53%, offering a Black Friday big discount. The new Omicron coronavirus variant created panic on the stock market. This new breed looks utterly different from the precedent version, thereby making current vaccines less efficient. A global spread of this new variant, which seems more dangerous, would have catastrophic effects.

The Fed plans to increase interest rates in 2022, and a foreseeable Omicron pandemic may torment the taper plans. Bitcoin continued its descent below USD 55,000 due to a wave of selloffs.

Focus:

Pfizer

When most analysts point to the increasing role of Big Tech in the equity markets, Big Pharma is slowly making a place under the sun. When the market moved into the negative territory, a few pharma shares were booming. Pfizer realised unprecedented profits with its COVID vaccine. While its vaccine may be inefficient, the new mutations in the “Spike” protein helped Pfizer’s share spike in a turbulent trading session. Pfizer’s novel COVID-19 oral antiviral will be the only hope for curbing a potential new wave of infections.

Focus:

Volatility is back

Options traders should be happy, as the volatility is back. Quantitative easing has inexplicably brought low-level volatility, despite a highly leveraged situation. When liquidity may be needed, the slow down in assets repurchasing in a future state of the market fuels fears of the unknown.  Life is unpredictable, and so are the markets. The market was mono-directional for almost two years, and now is the moment to let off steam.

Inflation:

Powell keeps his job

Jay Powell was minted by President Biden for a second term as Fed chair. Powell will deploy the taper strategy aiming to reduce borrowing and spending, slow the economy, and prevent non-transitory inflation. Slowing the assets repurchase will lead to turbulence on the market, and the Fed will be under a lot of pressure. But, both the Fed and the White House seem to be on the same page regarding a future increase in interest rates.

Moreover, several Federal Reserve policymakers revealed that speeding up the bond-buying taper is on the table.  High inflation is a critical concern, and central bankers may move more quickly to raise interest rates.

Interest rates:

10 Years US Government bonds

The spread of the new Omicron variant inflicts fear on investors.  The US Treasury debt becomes attractive amid bearish stock markets. The 10 years yield has fallen abruptly below 1.5%, following a massive market selloff. Investors are looking for safer values, and government bonds are not a bad option when other markets are preparing for further corrections.

Market outlook

The Dow Jones Index lost ground over the past week ending below 35,000. The new Omicron variant and anticipated tapering of bond repurchases signal the beginning of the market decline.

Bitcoin ended the week below USD 55,000, losing more than 7.5% in one week. While the technical sales will continue, it is not expected to see the leading cryptocurrency below 50,000 USD.

Oil prices boomed in the initial phase of the energy crisis. Nevertheless, COVID resurgence led to a two-state energy market, with oil prices moving into negative territory. If more countries opt for lockdown, we could see a downward trend in oil prices.

The Gold ounce ended the week on a negative note closing near USD 1,785. The foreseeable market contraction and the inflationary context are good arguments for believing that gold prices could soar in the near future.