U.S. Berkshire Hathaway, led by famed investor Warren Buffett, is stepping up its defensive posture. Despite the rapid recovery of the U.S. economy from the blow of the epidemic, Berkshire is once again increasing its cash on hand. What will the Biden administration bring to the market by moving to “big government”? Warren Buffett, known as the “stock god,” spoke with a sense of caution.
“Capitalism works very well, especially for capitalists. At Berkshire’s online shareholders meeting on May 1, Buffett took out 2 slides. List the companies that reside in the top 20 of the total global stock market capitalization in 1989 and 2021.
Buffett showed 2 main points through 30 years of changes. The total market capitalization of Apple in the U.S. (as of the end of March) is 20 times different from that of Japan’s Societe Generale (now Mizuho Financial Group) at the end of 1989, although it also ranks first in the world. The ratio of market capitalization to global gross domestic product (GDP) at the top of the list increased from 0.5 percent to 2.4 percent. This becomes evidence of the success of capitalism that invests capital in new growth companies and creates wealth. Another point is the strength of the United States, where U.S. companies are beginning to sweep to the top of the market capitalization charts.
Warren Buffett has shown unwavering confidence in U.S. capitalism in the past. However, lately there is not overwhelming optimism, but also confusion. Buffett also mentioned that the expansion of total corporate market capitalization confirms the problem of the gap between the rich and the poor, saying that it “highlights that something is happening to the equality that has become a topic of conversation in this country.
As Buffett said, the 1980s and beyond were the “golden 40 years” for capitalists. Former U.S. President Reagan advocated “small government,” cut fiscal spending, and stimulated private initiative by cutting taxes and easing restrictions. He also used monetary policy to reduce the money supply and successfully curb inflation.
As the main role of the U.S. economy changed from government back to the market, it was the capitalists who enjoyed the dividends, and the money invested in the U.S. stock market and U.S. Treasury bonds rose to about 100 times and 20 times respectively in the early 1980s. The real growth rate, excluding price increases, also reached 27 times and 5 times. In the U.S., the top 1% of the wealthy class accounts for 20% of all household income.
The Biden administration is moving to “big government. Striving to create jobs and close the gap between the rich and the poor, a massive fiscal stimulus was proposed. As a source of revenue, tax increases are envisioned for the wealthy and corporations. The Biden administration’s monetary policy also plans to tolerate higher inflation rates.
Paul McCauley, a visiting professor at George Washington University, who has been praised for his ability to predict the times by coining phrases such as “shadow banking,” said, “The U.S. will move to a politically led economy and is facing a paradigm shift after a gap of about 40 years.
The U.S. stock market is also likely to see a turnaround. Inflation reduces the value of stock dividends due to higher prices, in addition to higher costs for businesses. In past inflationary periods in the U.S., stock prices rose sluggishly. Goldman Sachs Group predicts that if the Biden administration’s tax reform is achieved, the profit per share of 500 major U.S. companies will be reduced by up to 6 percent. To determine the achievability of the tax reform, investors have intensified their wait-and-see attitude.
Warren Buffett (May 2019)
Warren Buffett said at a shareholder meeting that he was “not at all optimistic” about the outlook for inflation under the Biden administration, and then said, “Whatever happens, I’ll try to get a decent result. At the end of March 2021, Berkshire held $145.4 billion in cash and cash equivalents, the first increase in three quarters. Buffett has not taken investment action not only because the stock price is too high, but also because he fears it will usher in an era of investor suffering.
Many investors see this as a turnaround. In a March blog post, noted investor Dario wrote that “the U.S. could become an uncomfortable place for capitalism and capitalists,” expressing concern about increased U.S. taxation and restrictions on capital flows.
Buffett has previously identified the wealth gap as a major problem, having proposed tax increases on the wealthy, among other things, in 2012 under Obama’s administration. But at the shareholders meeting, he did not express his approval or opposition to the Biden administration’s tax increase proposal. Instead, he questioned American society saying, “Everyone is numb. No one cares about the size of the trillions of dollars (in fiscal spending) and only values the $1,400 (that the government hands out to everyone).”
Buffett said he has selected Greg Abel, vice chairman in charge of energy and other businesses, as his successor. Buffett is 91 years old this year. Buffett, who is about to retire, and the golden period of investors may be the curtain at the same time.
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