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Will the global economy bleed profusely in 2025? Stock god Buffett has given his judgment. Just these days, Buffett, holding $2 trillion in cash, finally started to take action. First, he bought Domino’s Pizza, and then he made significant purchases of stocks in Western oil, Sirius, and Verizon. There is a favorite Buffett indicator in the stock market, which is the total market capitalization of stocks divided by GDP to get a percentage. If it is greater than 100, it indicates a massive bubble in the stock market. Currently, the Buffett indicator in the U.S. has soared to 209%, matching the level during the 1929 crash, and far exceeding the 140% during the 2008 subprime mortgage crisis. This makes it understandable why, by the third quarter of this year, Berkshire has net sold stocks for eight consecutive quarters, and Buffett even liquidated $1 trillion worth of his favorite Apple stocks. But the question is, why has he started buying stocks again now? This year-end shopping spree by the stock god must indicate that he has sensed some special signals!!
If you observe closely, you will find that all clues and risks point to one target, which is oil. So why is Buffett focused on oil? On the surface, the key seems to be the price. Since April this year, Western oil stocks have fallen by 35%, almost erasing all gains of more than two years. This drop has brought Western oil's stock price into Buffett's hitting zone, which might be an enticing buying signal. However, for the stock market, his vision is certainly not limited to the current stock price. Some also say that Buffett is interested in Western oil's dividend yield. The preferred shares of Western oil that he holds can provide up to an 8% dividend yield, while the ordinary shares of Western oil have a dividend yield close to 2%. Together, Western oil can make Buffett earn 10% passively every year. In today's low-interest-rate environment, such a dividend yield is undoubtedly a solid moat. This reasoning does make sense, but have we completed the explanation of Buffett's investment logic? If we dig deeper, you will find that the fundamental reason Buffett is focused on oil may lie in his observation that the loosening of the petrodollar hegemony is leading to a redistribution of global economic power. In the mid-1970s, after the collapse of the Bretton Woods system, Saudi Arabia and other oil-exporting countries signed agreements to use the dollar as the settlement currency for international oil transactions. From then on, the dollar began to be linked with oil; without dollars, one cannot buy oil, which is called the petrodollar. Saudi Arabia exchanged its loyalty to the petrodollar for U.S. security guarantees, and the income from exporting oil, after deducting import expenses, was mainly used to purchase U.S. Treasury bonds. Thus, the petrodollar not only provided the U.S. with low-cost financing but was also key to preventing a collapse of massive amounts of U.S. Treasury bonds.
However, the situation has changed since last year. In January last year, the Saudi finance minister publicly declared that Saudi Arabia is willing to introduce other currencies into oil trade. In June this year, Saudi Arabia joined the multilateral central bank digital currency bridge project led by the Bank for International Settlements and China, indicating that Saudi Arabia is unwilling to be held hostage by the dollar. Although no one dares to say that the petrodollar trade system has collapsed, once the petrodollar starts to weaken, will the U.S. gradually lose its dominant position in the global financial market? Of course, the problems we see are also visible to Americans. For this reason, on one hand, before Trump returns to the White House, he is already preparing for the worst and resorting to all means to strengthen the hegemony of the petrodollar, firstly to cope with the increasingly growing fiscal deficit and debt levels, attempting to remove the debt ceiling, and secondly to threaten Europe. If they do not increase their purchases of American oil and natural gas, they will face sanctions from U.S. tariffs. On the other hand, the Russia-Ukraine conflict has made countries realize the importance of oil and gas energy. The impact of war on oil is evident, such as the instability of the situation in Syria, and the uncertainty surrounding Iran and Israel after Trump's rise to power, etc. All these factors together add a lot of uncertainty to the situation next year.
Looking back at Buffett increasing his stake in Western oil, perhaps the old man sensed the global economic situation for next year earlier than us. Unexpected situations may arise that could lead to soaring oil prices, and perhaps this is the core reason for his large-scale purchase of Western oil. What do you think?