Source: Chain News
Warren Buffett's Berkshire Hathaway Inc. revealed its holdings last week, with cash reserves hitting a new high. However, a large influx of funds into the leveraged market raises the question of whether this surge will lead to the final stage of an irrational boom. What hints do Buffett's cash levels give us?
The Buffett indicator has been high for a long time, and cash levels have reached a new high.
The 94-year-old Buffett remains cautious in deploying capital. At Berkshire's annual shareholder meeting in May, he expressed an investment willingness but also emphasized that finding attractive investment opportunities is not easy.
Warren Buffett mentioned in a December 2001 interview with Forbes that the ratio of total stock market capitalization to GDP can be used to judge whether the overall stock market is over or undervalued, hence it is commonly referred to as the Buffett indicator. This indicator measures whether the current financial market reasonably reflects fundamentals, with Buffett's theoretical index indicating that 75% to 90% is a reasonable range, while exceeding 120% indicates that the stock market is overvalued. According to charts by financial M Square, the Buffett indicator has been long at a high level since 2016, with the current value at 205%.
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Berkshire's cash reserves reached $325.2 billion in the third quarter, and for the first time since the second quarter of 2018, there were no share buybacks. This cash reserve is nearly twice the company's cash balance at the end of the year and is the largest cash reserve ever accumulated by Buffett.
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The relationship between Berkshire's cash levels and the market.
According to Bloomberg, over the years, the proportion of Berkshire's cash allocation relative to company assets has varied significantly, from 1% in 1994 to nearly 28% today, with various cases in between. Records show that as stock valuations rose during periods of prosperity, Buffett continuously increased Berkshire's cash allocation—resulting in a decrease in expected returns—and reduced cash when opportunities arose.
For example, during the internet bubble at the end of the 1990s, as valuations increased, Buffett raised the proportion of cash allocation from 1% four years earlier to 13% in 1998. But he reduced the cash allocation to 3% in 1999 (about a year before the bubble burst), likely because he found an attractive target. In hindsight, he might have been better off holding this cash for another year when cheap assets became plentiful, but even the great Buffett could not foresee the impending change. However, he made a good move by utilizing almost all of Berkshire's cash during the economic downturn.
Then, he turned again before the 2008 financial crisis. After the market recovery in 2002, Buffett started to significantly increase cash allocation, eventually reaching 25% of assets in 2005. But as the air of the impending crisis led to stock prices plummeting from the end of 2007, Buffett utilized his cash and ultimately reduced the cash proportion of assets to 7% in 2010, partly due to his savvy investment in Goldman Sachs Group Inc.
Bloomberg opinion columnist Nir Kaissar believes that Buffett bets on a simple principle that valuation and future returns are inversely proportional. That is, when assets are expensive, future returns tend to be lower, and vice versa.
The forward price-to-earnings ratio of the S&P 500 index is close to historical highs.
The largest fund management companies, including BlackRock, Vanguard, Goldman Sachs, and JPMorgan, expect the U.S. stock market to be far below the historical return rate of 9% per year over the past 150 years.
The current forward price-earnings ratio of the S&P 500 index is 25 times, close to historical highs, while the average price-earnings ratio since 1990 is 18 times.
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Experts calculate that the expected return rate for the S&P 500 index over the next 10 years is about 4%, which is not much different from the risk-free yield of 4.4% on three-month Treasury bills. Moreover, Berkshire's increase in cash reserves (mostly short-term Treasury bills) enhances his preparedness, which is not too surprising.
A large influx of funds into the leveraged market.
On the other hand, on the speculative edge of Wall Street, the fervor for risk is growing day by day. Including the self-proclaimed Bitcoin development company MicroStrategy and related leveraged high-risk ETFs, trading volume reached $86 billion this week, setting a historic high. MicroStrategy's stock price rose 24% in one week, and two leveraged funds based on the company saw a total inflow of $420 million.
Matt Tuttle, CEO of Tuttle Capital Management, which operates one of the funds, stated that this week he bought a series of MicroStrategy stocks through leveraged ETFs. His market makers had to buy more stocks to hedge their positions. 'Look at all the retail investors buying MicroStrategy options—constantly, constantly, constantly buying, it could get very crazy.'
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Daniel Kirsch, head of options at Piper Sandler, noted that the daily rebalancing of leveraged ETFs, whether amplifying ETF or single stock returns, can significantly amplify the volatility of the underlying assets, especially when daily fluctuations are large.
Of course, leverage and the general FOMO (Fear Of Missing Out) among investors may undermine bulls, just as it has recently helped them chase risk assets. Currently, there are no signs that investors are ready to reduce their exposure to risky assets.
But will this surge form the final stage of an irrational boom? What hints do Buffett's cash levels give us? Worthy of careful observation and thought by readers.
[Disclaimer] The market has risks, and investments should be made cautiously. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.
This article is reproduced with permission from: (Chain News)
'Berkshire is sitting on a pile of cash! With funds flowing into the leveraged market, is an irrational boom bubble coming?' This article was originally published on 'Crypto City'.