We all have people we look up to for guidance and inspiration. Many of us wouldn’t be where we are without a mentor who has guided us on the way or possibly a role model in the industry in which we work that inspired us. So, when that mentor or guide makes a big move to secure the future of his company we tend to pay attention. In this case the honor belongs to a 94-year-old ukulele and bridge player from Omaha, who also dabbles in investment management. His name is Warren Buffett.
In the third quarter of this year, the cash position in Berkshire Hathaway, his investment firm and publicly traded company, jumped up to 28% and the firm’s cash position has doubled in just a year. It’s also the most cash the company has kept in its portfolios in 34 years.
The obvious question is: why? To know that is to know the metrics that he’s using to evaluate the situation. Fortunately for us we don’t have to do a lot of sleuthing here. After all, there’s an indicator named after him that we know he looks at. It’s called The Buffet Indicator. Pretty convenient, right?
The Buffet Indicator measures the overall valuation level of the stock market by taking the total value of the US Stock Market of $60.86 trillion (as of September 30th) and dividing that total by the Annualized GDP of the US of $29.24 trillion1. You end up with a figure of 2.08 which you then express as a percentage – 208%. The current ratio of 208% is about 67% higher than the historical trend line. This tell us that the stock market is “Strongly Overvalued” in relation to GDP.
Now while this is a big move in Buffett’s portfolio at Berkshire we need to look at the current data. The CPI month over month was just announced today at 0.2% which means inflation is hovering around 2.6%2. The core CPI was 0.3%. Core CPI excludes food and energy. It’s the energy that is really down. Oil prices have been struggling and there’s some expectation in the middle of softening demand that the OPEC producers are going to eventually have to unwind their production cuts in an effort to bring more monies into their countries. We could see the price of oil at $40 one day soon. If that’s the case, the Fed has won and inflation (at least the way they count it) has subsided clearing the way for future rate cuts in 2025. Meanwhile with the Republican sweep of The White House and Congress there’s the beginnings of expectations that the Tax Cuts and Jobs Act which was signed on Jan. 1, 2018 could be extended and other types of tax cuts may be on the table. The deregulation that may come in 2025 could be a catalyst to economic growth.
Is Buffett going purely off of valuation? A glance at the chart of his Buffett Indicator would quickly reveal that the current market valuation according to his metrics is even higher than it was at the end of 2021, prior to the 2022 market crash.
We must keep in mind that while there are developments in the US that could potentially set up very favorably for growth it’s against a backdrop of market overvaluation and a pretty good run in 2023 and 2024. There are all kinds of reasons to be bullish as we noted last week, but it comes with a big disclaimer: we’ve been here before.
[For Clients]
We’d be fools not to let history guide us. So that’s why our Investment Committee has lowered the overall risk number of our Extended Equity ETF portfolio to a 63. Keep in mind the S&P 500 runs at about a 75. It’s what we call our “Stratactical Investing.” It’s a buy and hold philosophy that blends a willingness to trade when the story changes. Well, the story is definitely changing and we are hedging our bets on your behalf. Rest assured that if you want to “go for it” with your investing we still maintain our unaltered growth models that run hot enough to potentially compete with the market. You are our bosses, so let us know how you feel and we’ll get you into the model that makes the most sense for your goals. As ever, we remain your investment nerds for hire.
[For Non-Clients]
We’d be fools not to let history guide us. The story is definitely changing and we are hedging our bets on your behalf. Rest assured that if you want to “go for it” with your investing we still maintain our unaltered growth models that run hot enough to potentially compete with the market. You are our bosses, so let us know how you feel and we’ll get you into the model that makes the most sense for your goals. As ever, we remain your investment nerds for hire.
Sincerely,
The WTA Investment Committee
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