GoKawiilBerkshire Hathaway just reported a record $397.4 billion in cash and T-bills, 59% of its investable portfolio. After fourteen straight quarters of net equity selling, a streak that has continued unbroken under new CEO Greg Abel, what does the nearly $400 billion in cash signal?
If one is to take Warren Buffett at his word, Berkshire is just waiting in the wings for a good deal. But he’s also never been known to publicly predict market corrections, never mind a crash, so one is left having to read between the lines.
How High Is Too High?
One such line reading bears Buffett’s name. The Buffett Indicator, a ratio that measures the market cap of the entire stock market against the GDP of the United States, has hit a record of ~232%. Historically, anything above ~120% is a signal of the market being overvalued.
Skeptics of the Buffett Indicator will point to money in foreign markets not included in the ratio as a reason for the disparity. That might be true to an extent. However, another metric is also flashing warning signals. The Shiller P/E, or the CAPE ratio, has breached 40% for only the second time since 1929.
The CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio), divides the price index (say of the S&P 500), by the average inflation-adjusted earnings over the past ten years. The ten-year period, intentionally long, is meant to mitigate momentary peaks and valleys and give investors an accurate appraisal of whether the market is overvalued or undervalued.
On average, the Shiller P/E ratio sits around 17%, dipping down to 10% during a recession, or surging to 44.19% at the peak of the dot-com bubble. It recently reached 41.33%.
Is Berkshire Playing it Too Safe?
Beyond the Buffett Indicator and the Shiller P/E, both of which serve as barometers for the broader economy, what can be gleaned from Berkshire Hathaway’s core business to also explain its nearly $400 billion war chest?
Unlike the Magnificent 7 stocks, which remain ascendant, Berkshire Hathaway’s B shares are down 1.8% year-to-date. Berkshire is historically skittish about putting too much capital into tech, and might be suffering the consequences during tech’s historic bull run. That being said, Berkshire is not completely sitting on the sidelines either.
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