At the Berkshire Hathaway annual meeting on May 2, the eternally optimistic Warren Buffett displayed an unusual amount of caution about both the near term and intermediate term outlook for the U.S. economy. Indeed, it was the first time in over 50 years, since 1969 when he liquidated his partnership, that he has demonstrated a large degree of concern.
Born in 1930 and growing up during the Great Depression did not discourage Warren Buffett from buying 3 shares of Cities Service Preferred in 1942 during the early days of World War II when the U.S. was initially losing the war. At age 11, young Warren was demonstrating his belief in the the future of America. Whether it was the stock market crash of 1987, the 9/11 attacks, the Great Recession and Financial Crisis of 2007-09, Warren Buffett’s spirit could not be extinguished. But something changed by April 2020 with the COVID-19 pandemic. This is a once in a century event. The last similar pandemic impacting the United States occurred in 1918, the Spanish Flu, where an estimated 50 million people died worldwide, including 675,000 in the United States.
Previously, Warren Buffett had been exposed to the financial crises of the 1930’s and 2007-2009 which were preceded by excesses in the economy including large amounts of debt being used to purchase stocks in the 1920’s and likewise in the housing market prior to the Great Recession. These speculative bubbles built up over time but were observable. Similarly, the onset of both World War I and World War II were visible on the horizon. But the COVID-19 pandemic was an unpredictable event prior to its apparent initiation in China in December 2019. Unlike World War I and World War II which were fought in Europe and Japan (World War II), COVID-19 is a war against a virus that is being fought on the homeland of the United States, and in virtually every other country. The required social distancing and virtual lockdown of the population has resulted in a forced sharp downturn in the U.S. economy and around the world. As a result, the U.S. unemployment rate of 3.5% in February 2020, representing a 50 year low, has skyrocketed to 14.7% in April and is likely on its way to the 25% level that has not been seen since 1932.
Although the U.S. economy will likely return to its pre-coronavirus level over time, how long will that take, how much damage will be done? Treatments and testing and tracing of contacts of those who test positive for this virus will permit a gradual economic recovery until we have a vaccine. However, a vaccine is estimated to be at least 12 -18 months away. Will the virus subside over the summer? Will it re-emerge in the Fall? These are unpredictable outcomes. There is an expression in epidemiology: “Once you have seen one pandemic…you have seen one pandemic.”
Against this backdrop, where the expert epidemiologists do not know what will happen, Warren Buffett faces an investment landscape that can result in a very large range of outcomes from very good to very bad. Being the very conservative investor that he is, he has rationally chosen to hope for the best but prepare for the worst. Therefore, Berkshire’s cash of $137 billion on March 31, 2020 will probably be allowed to expand until we are on the other side of the pandemic and a vaccine is readily available for all.