Warren Buffett Dumping $13bn Worth of Stock Rings Alarm Bells Over Economy

Warren Buffett's firm Berkshire Hathaway has sold billions of dollars' worth of U.S. stocks in the first three months of the year, raising concerns among investors over the state of the slowing U.S. economy.

Nebraska-based Buffett, who is considered one of the greatest investors of all time, spoke to shareholders last week together with Berkshire's vice chairs Gregory Abel and Ajit Jain.

The trio revealed that their firm sold shares worth $13.3 billion in the first quarter of 2023 and invested a fraction of that same figure in the U.S. equity market, as reported by the Financial Times. Berkshire instead invested $4.4 billion in repurchasing its own stock and put $2.9 billion into the shares of other publicly traded businesses.

For Steve H. Hanke, a professor of applied economics at Johns Hopkins University, Berkshire's move signals that Buffett, whose famed ability to guess the state of the market has given him the nickname the Oracle of Omaha, is once again very perceptive regarding the health of the U.S. economy.

"Warren Buffet's dump of billions of dollars of U.S. stocks indicates that he correctly anticipates that a U.S. recession will make landfall in the near future," Hanke, who served on former President Ronald Reagan's Council of Economic Advisers, told Newsweek.

"In the past year, the U.S. money supply, measured by M2, has contracted by 4.1 percent. This flip from expansion to contraction is the steepest adjustment in money-supply growth in postwar U.S. history," he said.

M2 is the U.S. Federal Reserve's estimate of the total supply of money in the country's economy. This includes all of the cash people have plus all of the money deposited in checking and savings accounts, as well as other short-term saving vehicles such as certificates of deposit.

"With the usual lag of 6-18 months, economic activity will take a turn for the worse. When a recession is right around the corner, Buffett knows that cash is king, particularly when he can earn a decent rate of interest on it," Hanke said.

"Warren Buffett's warning to investors is very telling on where overall sentiment is towards equity prices and the economy," David Nicholas, president and founder of Nicholas Wealth Management, told Newsweek. "The three big risks for Buffett were China, the U.S. banking sector and commercial real estate. These are very real risks for economic growth and just one would be enough to derail growth, yet we are dealing with all three at the same time."

According to Nicholas, Buffett "has always acted as a voice of confidence for markets during turbulent times, but this marks a significant departure in his tone and positioning towards U.S. equities."

On Saturday, Buffett was pressed by shareholders to express his opinion on the state of the U.S. economy and the banking industry, which has been in turmoil following a series of bank failures that started with the collapse of Silicon Valley Bank (SVB) in California.

The billionaire, who in 2008 tossed Goldman Sachs a crucial lifeline by investing $5 billion in preferred stock in the bank, said this time he's more cautious about investing in the industry because of the rapid deposit flights some banks are suffering.

Berkshire invests the majority of its $130.6 billion of cash in short-term Treasury bills and bank deposits, a sign that the company has actually benefited from higher interest rates imposed by the Federal Reserve—while regional banks like SVB struggled.

According to Nicholas, Treasuries currently provide a "very attractive alternative" to equities.

"Berkshire Hathaway is benefiting from a sizable Treasury position that generates over $5 billion a year of dividend income," he said. "With economic uncertainty and earnings pressures, the time is right for investors to have increased Treasury exposure. Stocks are in a 'prove it' position compared to Treasuries and this will only add additional pressure to stock prices."