Warren Buffet in Cash as Federal Reserve Props Up Zombie Companies

Legendary stock market investor Warren Buffet added $10 billion in cash in the first quarter of 2020. Berkshire had a record $137 billion in cash and equivalent instruments on its balance sheet at the end of the first quarter, up from about $127 billion at the end of 2019. They bought $1.8 billion in stocks and $1.7 billion repurchasing Berkshire shares.

Staying in cash means having money to support the current Berkshire portfolio of companies and having money to buy clear opportunities later. The Federal Reserve is propping up the corporate debt markets. There are companies going bankrupt even with the Fed support. When the Federal Reserve lessens its support of corporate debt markets then many more zombie companies will fail. There will be valuable assets available at discounted prices when those companies fail.

Buffett is worried about the extreme consequences of the Federal Reserve buying corporate debt. He said the Fed has done a good job responding to the financial crisis caused by COVID-19 and the pandemic shutdown. Buffett is concerned about the longer-term impacts.

Mohamed El-Erian, chief economic advisor at Allianz, believes the Fed is creating zombie companies that should be dead but are continuing living because the Fed is providing nearly free money.

Written By Brian Wang, Nextbigfuture.com

53 thoughts on “Warren Buffet in Cash as Federal Reserve Props Up Zombie Companies”

  1. I think Buffet doesn’t like the current stock prices. He is going to wait on the chance prices will be better later on. I have money on the side waiting to get in but I am not going to buy at the current prices either. If the prices don’t drop I will just return the money to my savings account. I bought some at the initial drop and sold it back when prices jumped up, a little early.

  2. Buffet has been doing well for decades, but how much of that is because people think he is brilliant and copy his investments? It becomes self-fulfilling because people will pay more than he did to buy the stock inflating its value. And corporate loans come cheaper to companies he has invested in. What is so amazing about Kraft Heinz? If he was brilliant, shouldn’t he have been holding AMD or Tesla rather than Kraft Heinz?
    The only real reason the economy is down is because people are not working. They want to work. And they are going to be permitted to work. They did not all find other jobs. Most will be hired back.
    The more they owe, the more effort they will make to work harder to get back on track.
    There is also going to be a lot of forbearance. Banks and other lenders don’t want to foreclose on people, as there are not enough people who were not damaged by this and able to pay what the assets were worth, they don’t want the risk that they would have to hold them for months or years. And the social backlash on banks would be massive.
    Yes, a vaccine will take time. Though, I think with so many in the works and such a big prize, it will be 7 to 9 months for the first. But that really is not necessary for a 70%+ genuine recovery. All we really need are treatments that allow hospitals to save 75%+ of those currently dying. Then at least it is in the flu ballpark.

  3. Not really. Loans are deposits. “Money” isn’t created out of thin air, except during Quantitative Easing (and even then the reserves aren’t lendable).

    Loans by banks aren’t “created” out of thin air either. As a bank when making the loan I book an asset (loan) and a liability (deposit), and I will probably have to fund this balance sheet expansion (e.g., to stay within capital requirements) via borrowing (another deposit). There is no “money tree”.

    All this said, the Wuhan flu will require a huge amount of credit to pay for the cash flow problem, and of course extending existing loan conditions. Cash flow problems tend to become solvency problems.

  4. The difference between creating money and creating a loan that can be treated as money by the borrower is little different.

  5. A bank that is 100% reserved isn’t a bank, but a place where money is deposited. Good luck with returning to finance (or lack thereof) in the dark ages.

    The BIS only publishes guidelines, and the biggest voice in Basel is the Fed.

    Banks don’t create “money”, they make loans based on level of capital and risk appetite. And the value of the USD is directly related to how many investors like USD-based financial assets over others. Physical trade of goods is irrelevant to the value of USD.

    And yes, none of all this has anything to do with C19. C19 is a working capital problem and potentially a solvency problem.

  6. replacing one debt for another doesn’t work. You can’t force a U.S. gov bondholder to take a haircut. In theory you can, but then the whole market would go down the toilet. And this “money multiplier/fractional reserve banking” is pure nonsense. Banks are only constrained to lend based on capital level and risk appetite, not some “reserve level”. Nothing more. Funding said credit is a no-brainer. Just look at any bank’s balance sheet and how funding markets work.

    The current working capital liquidity crises can easily turn into a solvency crises. That is a balance sheet restructuring exercise, not some hocus-pocus explanation of “money”. If the solvency crises becomes severe, the MBS crash of 2008 will look like a mild market correction.

  7. Not really. lending is a function of a bank making the decision to lend. Funding that loan is a no-brainer and there are no constraints in reality.

    Also, I doubt the demand for new credit in a Depression.

  8. officially or not, we are heading in this direction. The banks are extending terms. It would be idiotic for them not to. As long as the customer has the ability to pay back a loan, you want to lend them money. Up until a point where the customer’s ability to repay is no more (e.g business closed for good, customers vanish, assets worthless etc). In the meantime, the Fed/Treasury steps in with measures to keep the banks afloat.

    Ie, it all depends on the length of time of this financial calamity. If this takes so long that a huge chunk of the underlying assets can’t produce income anymore (e.g., a steel mill stops producing and needs to shut down the furnaces which will take years to start up), no jubilee on the planet will help.

  9. The problem with this (not saying it shouldn’t be done) is that it shuts down new loans and investment, which by default creates or worsens a recession. That’d be a huge ‘gap’ that’d need to be filled.

    Maybe just say that the jubilee only applies to existing debts and rental agreements? That might actually *stimuate* new loans, to make up for lost income.

  10. If I understand the proposal, it would replace Federal Reserve notes with US Treasury issued notes and pay off US debt with a lot more of those US notes – but try to avoid inflation by simultaneously requiring banks to raise their fractional capital reserve toward 100%. Sounds nice, might work out OK in the long run.

    But the US doesn’t control the Bank for International Settlements that seems to set global banks’ capital reserve fraction.

    If foreign banks don’t follow the modified US banking reserve policy, the dollar would inflate and fall in value versus other national currencies anyhow. For US citizens, I think that’d greatly inflate prices of anything imported? It might result in the end of the dollar as the international reserve currency, which supposedly would reduce US global power?

    And I suspect big international banks would do whatever they could to make the US change-over look like a bad idea (e.g. inducing financial and economic chaos), since it reduces their ability to make money by literally making money.

    And while interesting, I don’t see what this does to ameliorate the COVID19 economic crisis?

  11. Been waiting twenty years for this thing call inflation to happen. Zilch, so far. Too much excess capital, too little demand.

  12. The solution is to declare a Jubilee year. No interest payments if you can’t manage it, and interest won’t accrue. The government will fill in the gaps to keep the banking system solvent.

    If you don’t do this then hell will break lose.

  13. If uncertain, be cautious. Even now there has been only a few studies to determine what percentage of the population has already been expose to COVID. And some of the studies had serious flaws. For example due to the high false positive rate of the antibody tests if you get a percentage positive under 10% your results isn’t useful. I, personally, think the death rate will be between 0.5% and 1%. 1% means about 3 million dead. I don’t think we are ready for that.

  14. You are correct. Letting COVID wash over us might have been the worse strategy. In fact, the lack of governmental effort could have lead to civil unrest.

  15. Warren’s wealth declares he is guesses more right than wrong. We have more than a year to go before a vaccine and the stock market prices are going north, why?

  16. Unless there is a complete paradigm shift in how the U.S. financial system works, I expect a banking solvency bloodbath together with massive small and medium sized companies going bust while selective large companies will go under.

    In round terms it is about an $15 trillion problem. Household debt is $15tr, business $15tr, Federal gov $22tr, State gov $4tr. About half the corporate/household debt is at risk, about 25% of the State/local. The banks and pension funds/investors hold all this risk. Unless the economy “opens” really soon (it won’t), about half the household/corporate side will be in technical default, or about $15tr at risk.

    I.e., the only choice is to socialize the debt straight out or via cash flow support to pay the coupons (like PPP which is a drop in the bucket). The amounts are so large the normal market mechanisms can’t deal with it. Technically, Uncle Sam can issue another $15tr and monetize it. Politically? who knows. I think that all this “financial tinkering” on the side that is going on (including Buffet) is a psychological response of not being able to fathom the problem.

    For China, this is built into their financial and political DNA. They could care less if 30-50 or 90% of businesses default, they just take it over, like they already have done.

  17. There is no way, no way at all, that I will actually do 8 1/2 hours per week of rowing machine or indoor cycling. Which is what my computer tells me I averaged over the past month on the actual bike.

    That’s probably the single most important part of exercising. Choosing something that you will actually do. And do regularly.

    I mean yeah, I can knuckle down and do 8 1/2 hours of exercise this week. And next week. And maybe… the week after.

    But to look back and find that I was doing that sort of thing every week for a whole year? I don’t think so.

  18. Don’t fall off a bike DrPat!
    There, undid that.
    Um…knee pads and elbow pads can’t hurt 🙂
    Or buy a rowing machine 🙂
    I have a Concept 2 erg and StairMaster 4400. Bought them both used. Quality machines. They should last for decades. Knew what I wanted and checked Craig’s List every day for months to get them.
    Need to get some weights though. Or I could throw around all the bags of cat food, and popcorn. I have 4, 50 pound bags of popcorn in tough plastic bags. There is a heavy truck axle I could lift, but it is near the bee hive and greasy. Lots of other heavy crap around here.

  19. I think a second crash would require a second stay at home period. That is looking unlikely. They seem to have resigned themselves into opening up, come what may. Can they continue that if deaths per day pass 8 or 10k? I don’t know the answer to that. I am hoping we don’t have to find out. I am optimistic that we will find effective treatments even if the hospitals fill. Reducing deaths is the big thing. People will be less frightened if deaths stay as they are or go down, regardless of any growth in cases.

  20. I used to hate all the extra packaging. Now it is looking pretty convenient. Though I don’t buy a lot of processed foods.

  21. Yes, I do that stuff. No lettuce. No way I could ever be sure that is clean. If it is green and leafy, and you can’t cook it, it is pointless to buy. Sure you could cook lettuce…won’t like what you get.
    But most of these measures assume some virus might be on there incidentally. If someone has a needle…? Cooked or from your own garden/trusted friend’s garden…I guess.
    I have 19 cats, a skunk, and 4 raccoons. If I grew lettuce, it is probably going to get peed on 🙁
    I like shelled raw sunflower seeds. But I buy them out of a bin at a health food store. Missing those. Don’t think I can trust the bins. Maybe I could steam/boil them. Probably just make them spoil fast 🙁

  22. If the states had not implemented forced shutdowns and social isolation, the economy would STILL have taken a massive hit from this pandemic – probably in early April, as infections continued growing at the mid-March/pre-shutdown ~30%/day rate.

    About 10% of the population would have gotten sick in just a few weeks, and apparently it would just keep increasing even faster. (Cases would have been about to flatten, as we neared saturation, thanks to all the invisible cases. But we wouldn’t have known that.)

    With hospitals overflowing, the death rate would have been higher and seemed even higher (again, not knowing of a high invisible infection rate). Panic would set in.

    Employees would call out ‘sick’, stores shut down, customers stayed away from any store they didn’t need to visit – and when they found an open grocery store or pharmacy they’d find shelves empty because of the panic and with so many workers out restocking wasn’t happening. Fresh food would be rotting in warehouses.

    In short, economic collapse.

    Those now outraged that the government did something would instead be outraged that the government did nothing to control the pandemic and allowed the economic collapse. Hearing those people demanding they “do something”, government would do so in a heavy-handed fashion, making the economic mess worse.

  23. No worries.

    “some coughing nurse “fondling” literally in excess of 20 tomatoes”

    One of the more troubling videos that came out of Wuhan was a woman couging on her hands and then rubbing her hands on car doors.

    For grocery store items we start from the premise that everything is contaminated and we figure out how to make it clean.

    Instacart/Amazon shopping bags never come inside the house, they are unbagged on the doorstep.

    All produce (Apples, Oranges, Avocados) sit in isolation for two days and then are washed in soap and water.

    Perishable goods (milk, cheese, frozen vegetables) are washed in soap and water before going in to the fridge.

    Non Perishable goods sit in isolation for 3-4 days. Everything that has an outer cardboard box (e.g. cereal) is opened- the box goes in the trash, the inner bag goes in the house.

  24. re: Cruise ship outbreaks-
    To date I have not seen an evaluation of the people on MS Diamond Princess who did not become infected. With the promotion we have had to defend the lockdown I had hoped for some thought about the resistance. Statistically, not smoking, being female, blood type O, and being young had some advantages, but I have not seen any reports on those who were not infected and were not sick. In my past life, I had to sign entry documents revealing diarrhoea cases, fevers, etc. on cruise ships to allow entry to port.
    It would be most interesting to study those who passed through the viral onslaught.

  25. Maybe I deserved some negative votes. I was a bit cynical.
    I was irritated on hearing my sister witnessed some coughing nurse “fondling” literally in excess of 20 tomatoes. And she had something else small and long in her hand as she touched every square inch of each tomato at a Walmart…and selected none of them.
    There must not have been enough overtime taking care of people on respirators. My sister told two of the Walmart people. They did nothing at all.
    And my sister is not a basket case. Quite brave. Trucking until 2 weeks ago…driving through Louisiana and other States with people coughing left and right.

  26. I think your deluded outrage is more likely to cause health concerns. The people who want all the government protective measures gone a month ago tend to be the most frazzled.
    I spoke in favor of panic regarding going out, only because such things are necessary to prevent the people who have no common sense or comprehension or trust of science from endangering themselves and the general public.
    Politicians soothing the public fears like de Blasio did a major disservice to the public, and cost many lives. The pandemic experts will tell you the same thing.

  27. Just because you were a member of the spice girls (if scary really is your name) doesn’t mean that… oh who am I kidding, I probably will fall off my bike fairly soon.

  28. Do old wise people generally make good decisions in unusual totally unprecedented situations? I am going to answer NO to that.
    I say buy when it is cheap…before it recovers too much.
    Sure there are the walking dead. But I think even some of the hardest hit mortgage companies will survive and even reasonably recover. People will return to theme parks, airlines, gas stations, sit-down restaurants and cruise lines. Though, to be honest, cruise lines are looking shaky. Doesn’t help when the breakout is right on their ships. But it does not shock me that they could survive. If they test every passenger and they pass before they get on using 15 minute tests, and positives don’t get on the boats. I think that would certainly help. Even though, it is no guarantee. And ultraviolet air ventilation would also help.
    I think there is an optimal time to buy stock in each down sector. Buy what you think will recover first then onto the next and so on. At least that is my strategy. Though more of a trend than really a full hand off. Some of it is guesswork. People may want motorhomes before they go back to airplanes as gas is cheap…or they may not because they would be in contact with more people at gas stations and these things don’t go through drive-throughs so easily.

  29. And support local politicians, not necessarily Congressional candidates. Because they are small they tend to think local.

  30. Warren explicitly says that he is waiting for a drop to invest.
    That’s what he means by

    There will be valuable assets available at discounted prices

  31. You misunderstood the “the banks didn’t want to be holding the bag” part. I was refering to banks favoring businesses that had already borrowed money from them. Banks have a vested intrest in seeing them survive, as when they fail, the banks will never get that loaned money back. Much less incentive to get loans for other businesses. And as likely less than 1% of small businesses who needed these loans got them…who do you think got them?
    In theory, both Partys wanted small buisness loans. But it became who you know, rather than needs based, or really helping the little guy.
    I could be wrong, but I thought “chamber of commerce” folks generally give money to local polititions rather than Congress or national election candidates.

  32. *Jeni’s ice cream is actually quite good

    Eventually everyone will be seduced by the dark side.

  33. Awwwe!
    Is mr. Flurry assaulting your religious belief structure?

    if my wife’s antibody test comes back positive tomorrow, I’m going to be insufferable as I destroy all you libtards that support this lockdown

  34. How do you still have the wherewithal to quibble about this shyt… panicking arsewhole leaders literally BLEW UP the world economy – here you are making fine points. You do not show ENOUGH OUTRAGE Combi. You were pretty close to cowering in fear over the last 6 weeks -now you believe in “carefully opening up”. Screw careful. Isn’t it obvious that the all the projections fell so short that you must REMOVE ALL RESTRICTIONS YESTERDAY? Nope. You still think caution is due. Pisses me off because you are usually one of the more reasonable. I wonder if mindbreaker escaped getting an ulcer.

  35. .
    These measures will no doubt save lives that would have been cut short by this virus. But they are also coming at incalculable cost—to our economies, our livelihoods, our civil liberties and freedoms, our social cohesion, even mental and physical health. In many ways it appears the ramifications of the reaction to the coronavirus will dwarf and far outlive the virus itself.” -STEPHEN FLURRY

  36. “In two lightning-quick weeks in March, America, Britain, France, Germany, Italy, Israel and other mighty nations worldwide went from caution to hysteria to lockdown. You’d have thought people were dropping dead in the streets by the millions.
    Not so. Out of the 7.8 billion people on Earth, only a few thousand had actually died from the Wuhan virus. Yet these governments tilted into full-scale panic.
    Granted, this particular coronavirus seems especially contagious, and it poses . Initial expert projections about death rates were shockingly high, some of them in the scores of millions.
    However, while politicians, the press and public fixated on infection rates and death counts, ’ . When prominent authorities backed away from their worst-case scenarios, it went virtually unreported. The world was too busy executing the strictest response to a disease ever recorded.
    Each day brought new and more heavy-handed restrictions and wilder interventions: Sports leagues, suspended. Flights, grounded. Schools, closed. Public gatherings, dispersed. Nonessential shopping, banned. Leaving home, illegal. Trillions of dollars, spent. Government emergency plans were more draconian than perhaps any modern peacetime measures, and

  37. Exactly. Wording. Zombie companies are an actual thing. Don’t call successful businesses that are forced by government to close “zombie companies”.

  38. Jeez 0 for 3.

    1: PPP loans are backed by the federal government. “the banks didn’t want to be holding the bag” The banks don’t hold the bag. In fact banks made half a point on every loan for which they do not hold the bag, the federal government holds the bag. These loans are free money for the banks. Que alternate left-outrage about free bank money…

    2: Republicans in congress pushed hard for the PPP small business loans, had to deal with Pelosi’s lethargy in coming to the conclusion that maybe if she didn’t fund small businesses then her Jeni’s ice cream wouldn’t be available*.

    3: Chamber of Commerce represents small businesses, is very pro Republican.

    *Jeni’s ice cream is actually quite good and doesn’t deserve to be dragged in to Pelosi’s “Let them eat ice cream” moment. Mrs. Combinatorics has made me drive to LA to buy it by the dry ice bagfull.

  39. A 10 second google would have shown you small business owners are 38 to 28 percent Republican to Democrat.

  40. Not really no since those are more about liquidity.

    Zombie companies are ones that are very leveraged (rely on a lot of loans) like large commercial real estate companies and car rental companies that normally would be forced to sell inventory at fire sale prices. Now they can get insanely low interest loans (considering the circumstances) and stay afloat. That’s a big problem as prices and expectations never get reset. See Japan for how bad that can get and for how long.

  41. Cash is a bad place to be if the Fed is pumping money in to the system. Buffet knows this and long term he will be out of cash, probably just waiting for a drop in the market to reinvest.

    “Zombie companies” like Disney for example? No movie revenue, no theme park revenue… but in a few months they won’t be a zombie.

    Don’t confuse temporary zombie companies due to the pandemic with actual zombie companies.


  42. Small businesses don’t support enough Republican members of Congress. There were some loans, maybe you could get, if you were in tight with the banks. Bank loans to you probably had to already be in jeopardy…loans the banks didn’t want to be holding the bag on when those businesses would have gone belly up.

  43. …believes the Fed is creating zombie companies that should be dead but are continuing living because the Fed is providing nearly free money

    Does this apply to the small business “loans”?

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