Buffett’s Hoarding of Cash Draws Attention Amid High Tech Bubble Risk Concerns

Warren Buffett, CEO of Berkshire Hathaway, speaks to the press as he arrives at the 2019 annual shareholders meeting in Omaha, Neb., May 4, 2019. (Johannes Eisele/AFP via Getty Images)

Warren Buffett predicted that Berkshire Hathaway’s cash reserves would swell to $200 billion during the 2024 shareholder meeting for the American multinational conglomerate holding company.

“We’d love to spend it, but we won’t spend it unless we think they’re doing something that has very little risk and can make us a lot of money,” Mr. Buffett told the meeting on May 4.

Over the past 10 months, Berkshire Hathaway has been increasing its cash reserves. Currently, it holds a record $189 billion in cash.

Known for his consistently reliable economic predictions, Mr. Buffett’s cash pile raises the question: what opportunities is he waiting for? Bill Smead, CEO of Smead Capital Management, told CNBC that “[Mr. Buffett] is as bearish as he ever gets [on the stock market].”

Mr. Smead also told Bloomberg that unless Mr. Buffett has “a chance to buy an entire company or there is a major market sell-off of 30 percent or more,” he is unlikely to use these funds.

The legendary investor made several high-profile acquisitions after the burst of the dot-com bubble in 2000, showcasing his market prediction acumen. At that time,  he significantly increased his holdings in American Express, from 50 million shares in 1999 to 152 million shares in 2001. Additionally, between 2000 and 2003, he completed several acquisitions, including eight deals in 2000 alone, totaling about $8 billion.

Related Stories

Buffett Talks Succession at Berkshire Annual Meeting; FAA Opens Probe Into Boeing 787 Inspections | Business Matters Full Broadcast (May 6)

5/6/2024

Berkshire Hathaway Event Gives Good View of Warren Buffett’s Successor but Also Raises New Questions

5/5/2024

In the three years following the dot-com bubble burst, the Nasdaq index plummeted by nearly 80 percent, while Berkshire Hathaway’s market value grew by about 30 percent, significantly outperforming the broader market.

Currently, the U.S. stock market is led by seven high-tech companies: Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla, collectively known as the “Magnificent 7 (M7).”

The market’s frenzy over these high-tech and AI stocks inevitably reminds investors of the dot-com bubble more than 20 years ago. Since last year, some have expressed concerns along this line, with U.S. market forecaster Gary Shilling reminding investors to prepare for an upcoming recession and boldly predicting that the stock market could plunge by as much as 30 percent this year.

A file image of stock numbers for Apple displayed on a screen at the Nasdaq MarketSite in Times Square in New York City, on Jan. 29, 2019. (Drew Angerer/Getty Images)

As of November 2023, the market capitalization of the M7 has increased by about $5 trillion compared to the beginning of the year, reaching $12 trillion. The Nasdaq’s total market capitalization increased by about $6 trillion, indicating that Nasdaq’s performance in 2023 was almost entirely supported by these seven high-tech companies. Additionally, the M7 accounts for 30 percent of the S&P 500 index, and their fluctuations significantly impact the overall stock market index.

This phenomenon inevitably reminds investors of the dot-com bubble crisis in 2000. The market value of the leading tech companies at that time—Microsoft, Cisco, Intel, Oracle, IBM, Lucent (now Nokia), and Nortel Networks—accounted for about 19 percent of the stock market.

Given that the current Nasdaq market performance is primarily driven by the M7 high-tech stocks, investors are beginning to analyze the similarities between now and the 2000 dot-com bubble.

Data shows that during the internet bubble growth period from 1999 to 2000, the Federal Reserve raised the policy rate from 4.75 percent to 6.5 percent. During this period, the Nasdaq index roughly doubled. Afterward, the Fed kept the policy rate unchanged in the second half of 2000 and began cutting rates in early 2001, at which point the internet bubble had already burst, and the decline was continuing.

Regarding the current U.S. stock market led by the surge in AI and other tech stocks, prominent economist David Rosenberg, who called the 2008 recession, warned in a Business Insider report on Feb. 12 that the significant increases are a double-edged sword for investors because the market environment looks very similar to the pre-dot-com bubble and the 2008 crash.

“With each passing day, this has the feel of being a cross between 1999 and 2007. It is a gigantic speculative price bubble across most risk assets, and while AI is real, so was the Internet, and so were the high-flying stocks that populated the Nifty Fifty era,” Mr. Rosenberg said.

Fed’s Rate Cut Schedule Keeps Markets in Suspense

The future direction of the stock market and other capital markets, as well as the real economy, will be influenced by the Federal Reserve’s rate cut schedule and frequency. However, the Fed has yet to provide a clear answer.

After a two-day policy meeting, the Fed announced on May 1 that the target range for the policy rate remains at 5.25 percent to 5.50 percent and will slow down quantitative tightening (QT) from June, as expected by the market.

QT is a monetary policy where central banks reduce the money supply by decreasing their holdings of financial assets, like government bonds and mortgage-backed securities. Instead of reinvesting the proceeds from maturing securities, the central bank lets them expire, shrinking its balance sheet. This process tightens financial conditions and can lead to higher interest rates.

Federal Reserve Chair Jerome Powell holds a press conference at end of the Federal Open Market Committee (FOMC) meeting in Washington on May 1, 2024. (Saul Loeb/AFP via Getty Images)

Fed Chairman Jerome Powell stated at the subsequent press conference that gaining confidence in rate cuts would take longer than previously expected. He still did not give a clear conclusion but indicated that given the short-term rise in inflation expectations, the possibility of the next rate hike is low.

Since the Fed started this rate-hike cycle in March 2022, it has raised rates 11 times in just 16 months, with a cumulative increase of 525 basis points as of July 2023. Currently, interest rates are at their highest level in 22 years and have been maintained for about 10 months. The market had anticipated three rate cuts in 2024, but these have been delayed multiple times.

When will the rate cuts happen? Will current AI stock prices experience a burst similar to the 2000 dot-com bubble when rates are cut? These questions are closely watched.