The Big Money Is in the Waiting
Why a recession is in the cards... Porter Stansberry on Warren Buffett's cash hoard... Two red flags Buffett sees... Inflation is killing consumers... Crippling debt... The big money is in the waiting...
Editor's note: Today, we're bringing you another guest essay from Stansberry Research founder Porter Stansberry. (If you missed the one on Friday, you can check it out here.)
As we mentioned on Friday, Porter recently sat down to record a brand-new interview with longtime friend and Stansberry Research partner Dr. David "Doc" Eifrig. It will debut tomorrow morning.
This is a wide-ranging discussion that will be presented to Stansberry Research readers only. And to keep it private, the broadcast will be available for just 48 hours.
It will cover all the questions we think longtime subscribers and fans of Porter might be curious about, including what really happened behind the scenes with him and our business over the past few years, what he's doing now, and his four big predictions for 2024.
You can sign up to watch here.
In this essay, originally published last month at Porter & Co. – the boutique investing research firm he started in 2022 – Porter shares his take on recent moves made by legendary investor Warren Buffett.
As Porter explains, whenever Buffett sees bad times approaching, he raises a pile of cash. Then he deploys it at what he feels is the right time and the right companies. It's an approach that has much to teach investors...
Right now, Warren Buffett is sitting on $157.2 billion in cash...
His company, Berkshire Hathaway (BRK-B), reached a record cash hoard after selling its entire stakes in General Motors (GM), Johnson & Johnson (JNJ), and Procter & Gamble (PG).
One of these stocks deserves special mention – General Motors. Buffett doesn't make many investment mistakes, but buying GM was a terrible decision.
We made one of the most important (and most obvious) calls of our careers back in 2007 when we began to write our "Letter From the Chairman of General Motors" about the growing inevitability of a GM bankruptcy. At the heart of our analysis: GM wasn't earning any money selling cars. Instead, GM had become an enormous (and very risky) bank via its GMAC subsidiary. And, even these financial earnings weren't enough to cover its interest expenses and pension obligations.
Buffett purchased GM in 2012 shortly after it emerged from a government-engineered pseudo-bankruptcy. The unions were paid out about $0.90 of what they were owed, received a slew of preferred shares, and got board seats. The company's creditors got robbed. They received about $0.10 on the dollar in newly issued equity that sat below the union's preferred stock in the capital structure.
Thus, today's GM is a company born out of a crime. It's since become a real-time litmus test of modern management theory – the idea that "diversity" is an attribute in corporate boards.
Today a majority of GM's board members are women. I'd be willing to bet $100,000 that none of them can change the oil in their cars. Meanwhile, every member of GM's board (according to the proxy statement) has expertise in ESG issues – the popular acronym for environmental, social, and governance. But only one board member (out of 13) has any automotive-industry experience – and that's Jonathan McNeill.
Interestingly, he doesn't own a single share of the stock. Likewise, neither do five other directors. And none of them, not even one of the 12 outside directors of the company – who are supposedly representing the interest of GM's long-suffering shareholders – owns any significant amount of stock. Instead of a board made up of industry veterans and major shareholders, GM's board looks like a modern Disney movie. And it's about as profitable too.
As outsiders, it's difficult to know exactly how much Buffett made. But we do know in his 2021 letter he reported holding 52.9 million GM shares with a cost basis of $1.6 billion, or about $30.50 per share. And we know he sold 10 million shares at $37.75 in Q1 2023, then 18 million shares at $34.61 in Q2 2023; then 22 million shares at $35.58 in Q3 2023.
Adding it up, we estimate he made something like 10% to 12% on these investments. But... that's over a 10-to-11-year holding period. If you would have bought the S&P 500 instead of GM at the same times that Buffett bought and sold GM, we estimate you would have made about $2.8 billion – 173%.
Moral of the story: it's usually a bad idea to buy enormous, low-return-on-asset businesses that require huge capital investments, and that make products that are largely commoditized. Especially when they've been led by a cast of clowns.
We admit that bashing GM has long been a hobby horse of ours, but we do think Buffett exiting the position entirely and building a record level of cash is significant.
Historically when Buffett has built up such a large cash position, it's preceded or coincided with an economic slowdown or shock.
Looking at past hoards of cash...
The last time Berkshire had so much cash was in November 2021. At the time, unprecedented fiscal and monetary stimulus, low interest rates, and strong consumer spending helped inflate stock valuations following a sharp market decline tied to the 2020 COVID-19 lockdown.
What happened next?
The S&P 500 Index peaked in December 2021 and would eventually collapse by 25% over the next several months.
Between the end of 2013 and the end of 2015, Buffett grew Berkshire's cash hoard from $45 billion to $64 billion – an increase of 42%. Most investors won't remember, but there was a mini-bear market in late 2015 and early 2016. The S&P 500 declined 19% and tech stocks fell more. Shares of Apple (AAPL) fell from the low $30s to the low $20s by May 2016.
And you know what happened next.
Buffett purchased almost 40 million shares of Apple in the first quarter of 2016 and 21 million more shares in the second quarter that year. He followed those purchases up with constantly buying every quarter between the fourth quarter of 2016 and the third quarter of 2018. He's bought more Apple shares in early 2022 and early 2023. In total Buffett owns almost a billion shares worth $175 billion – roughly half his entire portfolio.
Since Buffett started buying AAPL in the first quarter of 2016, shares have increased by more than 760%, blowing away the Nasdaq Composite Index's increase of 250% since then.
Now, Buffett seems ready to move again.
Berkshire Hathaway now has a record $157 billion to deploy.
Which means, if previous periods when Buffett increased his cash position are any indication, there could be storms on the market's horizon.
Two red flags Buffett sees...
Buffett has good reason to be wary – he looks at the same indicators that we do. Two especially bright-red recession warning flags are the tech-stock bubble and the shrinking total money supply in the economy.
We know that the bull market that's kicked off since last October is little more than a mirage. It's been fueled by a small number of overvalued stocks... Here's the Magnificent Seven you're always hearing about and their [price-to-earnings] ratios: Nvidia (NVDA) at 119x, Tesla (TSLA) at 79x, Amazon (AMZN) at 76x, Apple at 31x, Microsoft (MSFT) at 36x, Meta Platforms (META) at 30x, and Alphabet (GOOG) at 26x.
These stocks have created an even more concentrated and even larger financial bubble than the epic tech bubble of 2000.
Here's a chart I presented at our recent Porter & Co. conference at my farm. When I did, everyone got very quiet.
Just compare the Nasdaq 100 (the biggest tech stocks) to the Russell 2000 (the smallest U.S. listed stocks) over the last 25 years.
During the dot-com bubble's peak, the Nasdaq 100/Russell 2000 ratio hit 8.1. That means tech stocks were 8.1 times more expensive than small-cap stocks.
Today... tech stocks are 8.25 times more expensive than the Russell 2000.
Unfortunately, too many people (especially pundits and talking heads) forget that mean reversion works like a magnet, pulling it back to historical averages over time.
And when the recession eventually hits, we'll see those Magnificent Seven stocks – with market capitalizations well above $1 trillion – take the air out of this massive bubble. These stocks all have downside potential of 50% or more in the next 12 months as a recession tears through the U.S. economy.
In addition, M2 or total money supply (cash and checking accounts) is contracting for the first time in 74 years. Each time this has happened, dating back to the Civil War, double-digit unemployment and a depression have followed.
Sure, the central bank and Congress may continue pumping stimulus to try to save their jobs. But this indicator has only experienced this type of contraction four times in the last 150 years.
But what's different this time from the previous ones?
Inflation...
The silent killer was at a 40-year high just over a year ago. If the Fed tries to pump more stimulus into the coming disaster, inflation will only shoot right back up to those levels or worse.
Inflation is already killing the consumer. So too is crippling debt.
Credit conditions remain highly worrisome for the horizon. In September, S&P Global Ratings warned "credit conditions for borrowers in North America will likely deteriorate" due to higher rates and a likely recession.
The company projects that the U.S. trailing-12-month, junk-corporate-bond default rate will hit 4.5% by June 2024.
And the surge in consumer-credit delinquencies rivals the 2007 period, one year before the epic financial meltdown that sank the global economy. Mortgage rates have swelled above 7%, credit card debt has hit all-time highs above $1 trillion, and car-loan defaults have risen above 2%, according to the FDIC.
These negative economic factors – and plenty more – lead us to believe that a recession remains imminent for 2024 despite the ample amounts of infrastructure stimulus and massive government deficits.
Waiting for the storm to hit...
While the mainstream media continues to toe the line on economic reports, it's evident that consumers and businesses are hurting, and contraction is inevitable.
We believe that Buffett sees the same storm coming and wants to be ready to deploy capital at points next year when the market moves lower. Buffett will continue to request discretion from the Securities and Exchange Commission on one or more of the companies he is buying or in which he is building stakes.
This will allow him ample time to allocate capital over a period of time to dollar-cost average into these positions. By the time his positions are eventually disclosed, he will have exploited the value created in the market by this pending downturn.
Any upcoming period of volatility will fuel panic among most retail investors, but we argue that it presents an uncommon opportunity.
It's also important to note that cash is a position and an essential tool for a patient investor. Investors don't need to allocate every dollar available to equities, bonds, or other assets. Buffett's longtime business partner Charlie Munger once said, "The big money is not in the buying or selling, but in the waiting."
We follow a similar blueprint. We believe the surest way for investors to protect – and even build – wealth in the years ahead is to own the world's most dominant, capital efficient businesses, as well as hard assets (particularly gold and Bitcoin).
That's why we have built a portfolio dedicated to these businesses that would be attractive to Buffett and other investors who style their portfolios around long-term forever companies – or "Inevitables," as Buffett describes them.
As Buffett once said, "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold." While we can't predict the weather or the timing of the market, it feels like that time is fast approaching. Build up your own cash hoard – and be ready to buy when the storm arrives.
Editor's note: If you've read any of Porter's work over the years – or even if you haven't and simply enjoyed his take today – we urge you to watch the brand-new sit-down interview Porter recently recorded with Doc. It will debut online tomorrow.
In this special broadcast, Porter and Doc discuss why Porter hasn't written to Stansberry Research subscribers in so long... why he felt compelled to start Porter & Co... and what his plans are for our business today and in the future.
Plus, Porter will further detail how he's looking at the markets right now and explain how to prepare for what's ahead. This includes more about why it will pay to stay patient – and have a plan – ahead of the financial chaos he believes we're due for in 2024.
You can get all the details in Doc's interview with Porter. As we said, he covers the full story about where he's been these past few years, and much more. Click here to sign up to watch when it goes live tomorrow morning. It will only be available for 48 hours.
New 52-week highs (as of 12/15/23): ABB (ABBNY), Autodesk (ADSK), Applied Materials (AMAT), Advanced Micro Devices (AMD), Amazon (AMZN), CBRE Group (CBRE), Costco Wholesale (COST), Salesforce (CRM), Commvault Systems (CVLT), CyberArk Software (CYBR), Fidelity National Financial (FNF), Home Depot (HD), ICON (ICLR), Intel (INTC), JPMorgan Chase (JPM), UiPath (PATH), ProShares Ultra QQQ (QLD), Qualys (QLYS), Ryder System (R), Invesco S&P 500 Equal Weight Technology Fund (RSPT), SentinelOne (S), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), StoneCo (STNE), Trane Technologies (TT), Twilio (TWLO), Sprott Physical Uranium Trust (U-U.TO), and Advanced Drainage Systems (WMS).
In today's mailbag, feedback on Porter's essay from Friday about "the three-year lag the Fed always forgets"... Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.
"One more example of how history repeats itself [is] because human nature is ingrained in the DNA and doesn't change." – Subscriber Philip K.
"Glad to have Porter back on board... His insights have been outstanding and his investment advice very rewarding. No doubt we are headed for a credit default cycle. Nice to have Porter on our side for this upcoming crisis." – Subscriber Jim M.
Regards,
Porter Stansberry
Stevenson, Maryland
December 18, 2023