Daily Brief: Warren Buffett Has A Major Warning For US Investors

Daily Brief: Warren Buffett Has A Major Warning For US Investors

almost 3 years ago3 mins

Mentioned in story

Warren Buffett hit investors with a home truth over the weekend: the legendary investor said everyone should be worried about rising inflation in this “red-hot” economy.

What does this mean?

When Buffett speaks, investors listen. So they were all ears at his firm’s annual shareholder meeting at the weekend, when the Oracle of Omaha admitted that he thinks the economy is in overdrive. He puts that down to both a faster-than-expected post-pandemic recovery and the US central bank and government’s massive support measures. Combine that soaring growth with ultra-low interest rates, and you get a population with more money in their pockets and a willingness to pay higher prices for goods and services. And that, Buffett says, will only lead to one thing: sky-high inflation.

More tinder

Why should I care?

For markets: Warren’s got some competition.

Buffett also talked about how his firm, Berkshire Hathaway, ended last quarter with a near-record $145 billion of cash. Turns out the legendary dealmaker’s been struggling to find deals to make, which, he acknowledged, was mostly down to the recent boom in special purpose acquisition companies (SPACs). Companies looking to raise money, after all, could fetch much higher valuations by merging with the new investor must-have than by selling to a bargain-hunting investor like Buffett.

The bigger picture: Nothing lasts forever – not even SPACs.

Still, Buffett doesn’t think the SPAC craze will go on forever, and he might just be right. For one thing, SPACs are increasingly struggling to raise money from private investors. For another, regulators are increasingly looking to crack down on the frenzy. And finally, investors in SPACs seem to be increasingly running out of steam: shares in companies that went public via a SPAC are down by 40% on average from their highs, according to the Financial Times – and some by more than 80%.

10 SPACS down the most

Keep reading for our next story...

US Retail Investors’ Stock Holdings Just Hit A Record High

Stocks image

Fresh data out on Monday showed US retail investors’ stock holdings just hit a record high, but it’s all funds and games until someone loses an eye…

What does this mean?

According to investment bank JPMorgan, the percentage of US households’ financial assets devoted to stocks hit 41% in April – the highest level in history. That heady enthusiasm comes at a time when US stock prices are hitting one record after another, fueled by a faster-than-expected economic recovery and boosted further still by an expectation-busting earnings season. Throw in the government stimulus checks that fueled a record rise in household incomes last week, and it looks like retail investors have had the means and the motive to buy, buy, buy.

Stock allocations among US households
Source: The Wall Street Journal, JPMorgan

Why should I care?

For markets: Bubbles are back on the agenda.

Retail investors have also increasingly been trading using leverage – that is, borrowing money to magnify their bets. In fact, recent data showed that the amount of money they’ve borrowed from brokers to buy into markets hit its own record high last month. And since investing on borrowed money carries a lot of risk, contrarian investors – eyeing a market that’s being bumped up by those very investors – might be about to start yelling “bubble” again.

Margin debt balances, monthly
Source: The Wall Street Journal

For you personally: Show bonds some love.

The more money investors spend on stocks, the less they have for bonds. Some are even questioning why – with yields still so low – they need them in their portfolios at all. But just as a friendly reminder, bonds – which offer a more dependable return than stocks – still serve an important role in a well-diversified portfolio: they act as a hedge against a falling stock market, and they’ll serve you well if the contrarians are proved right…

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG