Warren Buffett warns debt investors face ‘grim future’ days after crushed liquidation government bonds and sent reverberations to global stock markets.
The 90-year-old chief executive of Berkshire Hathaway told shareholders in his well-attended annual letter that it was best to avoid the fixed income market, in which the company itself is a big player.
“Fixed income investors around the world – whether they are pension funds, insurance companies or retirees – face a bleak future,” he writes. “Competitors, for both regulatory and rating reasons, need to focus on bonds. And links are not the place to be these days.
T-bill prices fell dramatically last week, driven by the transfer of investors who see faster economic growth taking hold. Optimism around a global expansion has also rekindled concerns about a peak inflation, even nascent, and the prospect that central banks may have to adjust their stimulus policies.
Many investors had decided to adjust their portfolios ahead of the Treasury bill sale this week, buying lower quality debt securities with higher yields. Buffett warned on Saturday that the decision of insurers and bond buyers to “cut the pathetic yields now available by shifting their buying to bonds backed by weak borrowers” was a concern.
“Risky loans, however, are not the answer to inadequate interest rates,” he said. “Three decades ago the once powerful savings and loan industry was destroyed, in part by ignoring this maxim.
The pessimistic assessment of the sovereign debt market accompanied Berkshire’s fourth-quarter results, which showed the company’s net profit rose nearly 23% from a year before $ 35.8 billion, or $ 23,015 per class A share.
The rise was propelled by gains on investments and derivative bets, as the US stock market as a whole advanced in the last three months of 2020. Accounting rules require Berkshire to report changes in the value of its investments in stocks in companies such as Apple, Coca-Cola and Verizon as part of its quarterly results, causing large swings depending on the direction of the market.
Berkshire’s underlying business showed some resilience towards the end of last year, with operating profit up just under 14%. For the full year, which included the fallout from the coronavirus crisis, operating profit fell 9% from a year before $ 21.9 billion.
Buffett directed much of the company’s firepower in the fourth quarter to buy back Berkshire shares, spending $ 8.8 billion on his own shares. For the entire year, it bought back $ 24.7 billion worth of its shares. The share buybacks helped shrink Berkshire’s gigantic cash flow from $ 145.7 billion at the end of September to $ 138.3 billion at the end of the year.
The dean of the investment world used his annual letter to reaffirm his belief in the US economy, telling shareholders that the country had “moved on” and that they should “never bet against America.”
Although he has in the past weighed in on the country’s leadership and supported Hillary Clinton’s candidacy in 2016, he did not address Joe Biden’s election to the White House and only briefly mentioned the rift. in the land that was laid bare. the past four years.
Buffett said progress towards “a more perfect union” had been “slow, uneven and often discouraging”. But he added that the country would keep moving forward.
“In its brief 232 years of existence, however, there has been no incubator to unleash human potential like America,” he wrote. “Despite serious disruptions, our country’s economic progress has been breathtaking.”