The Question Warren Buffett Can't Answer

'Never bet against America'... Actions speak louder than words... Berkshire Hathaway uses 1% of its cash... 'The most interesting question I've ever seen in economics'... The question Warren Buffett can't answer... All-in on gold...

If anyone thinks fancy PowerPoint slides are 'essential' to get a point across...

Warren Buffett blew that idea to pieces on Saturday during the first online shareholder meeting in Berkshire Hathaway (BRK-B) history...

Times New Roman font... white background... black text... Take that, Gov. Cuomo!

When you're a guy with Buffett's "wise and rich" reputation and investors are hanging onto your every word, how it looks when you speak becomes less important...

Spartan slides aside, for more than five hours(!) on Saturday, the 89-year-old Buffett was joined by Berkshire Hathaway Energy Chairman and CEO Greg Abel – 30 years younger than Buffett. Abel attended the annual meeting in place of Buffett's longtime partner Charlie Munger, 96, who is in "good health" and will be back for the meeting next year, according to Buffett.

Buffett and Abel sat 6 feet apart on a well-lit stage. They wore suits and ties in front of a theater-style background, speaking in front of TV cameras and about a dozen people in an otherwise empty Nebraska convention center.

It was a "made for TV" event... or, to be more precise, "made for streaming."

Berkshire shareholders, if they had reliable Internet connections, could watch the whole event live from anywhere in the world... It was like watching a concert or a televised golf match between Tiger Woods and Phil Mickelson, except for investors.

Buffett's big idea (again)? 'Never bet against America'...

By now, you've likely seen that line... and heard it from the "Oracle of Omaha" plenty of times before in public appearances and reports throughout his life.

But in today's pandemic context and with the examples that Buffett used and the tone he struck during his presentation, this time his words felt like a pep talk of sorts to the American investing public. He said things like...

I remain convinced... I was convinced of this in World War II, I was convinced of it during the Cuban Missile Crisis, 9/11, the Financial Crisis – that nothing can basically stop America.

And...

If you had to pick one time to be born and one place to be born... you would not pick 1720. You would not pick 1820. You would not pick 1920. You'd pick today and you would pick America. Ever since America was organized... people have wanted to come here.

And...

Nothing can stop America when you get right down to it... In the end, the answer is, "Never bet against America."

Buffett even read a passage from the Declaration of Independence.

So those were the pre-planned thoughts that Buffett articulated. Upbeat, kind of... at least in the long term.

But then he got into details – and they told a different story...

Specifically, about the short term.

Berkshire reported a net loss of $50 billion in the first quarter of the year, and it has a company-record $137 billion of cash on hand. That's about $10 billion more than the company had on hand at the start of the year.

What Buffett and Berkshire have actually done with their billions since the coronavirus outbreak hit the U.S. doesn't necessarily show they're betting against America... but they're surely not confident in things right now.

Buffett has sold every single share, totaling billions of dollars, that Berkshire owned in major airlines American Airlines (AAL), Southwest Airlines (LUV), United Airlines (UAL), and Delta Air Lines (DAL).

And when Berkshire's stock crashed along with everything else in March, the company repurchased only $1.7 billion of its own shares, a little more than 1% of the total cash the company has on hand.

Plus, when he spoke, Buffett's tone sounded more like a concerned parent than anything else.

'Watch what people do, not what they say'...

Our friend and Empire Financial Research founder Whitney Tilson was one of a select few folks on a "virtual" panel of experts called on by Yahoo Finance to analyze the meeting before and after it took place...

Before Saturday, Whitney had been to every Berkshire meeting for the past 22 years. He even wrote a chapter in Munger's Poor Charlie's Almanack, a fantastic read. Whitney was still "there" on Saturday, albeit watching it via livestream with most other interested parties.

Here's what he said on the Yahoo broadcast somewhere around 9 p.m. Eastern time after the meeting finally wrapped up...

As I said before the meeting, I knew he was going to say we're bullish on America... but you've got to watch what people do, not what they say, and he's been a net seller of equities, to the tune of about $3.4 billion so far this year in a period of time when, I thought anyway, it was raining gold.

So, he clearly does not think it was raining gold. He was very cautious.

With the decisions Buffett has made, he thinks that having cash on hand – and the ability to redeploy it when the time is right – is more valuable than taking on the risks of buying back his own stock, much less anyone else's.

The point is, when you're trying to gauge someone's market outlook or the truth of their beliefs, it's often more valuable to watch what they do, not what they say... (For example, we looked at public records a couple of weeks ago to see that Berkshire sold stakes in Delta and Southwest, as we noted back in the April 16 Digest.)

For more on Berkshire's annual meeting, we encourage you to check out what Whitney wrote today in his free daily e-letter. It's full of more information and insight.

Of course, other times, you should pay attention to only what someone says, too...

Especially when it comes to the "big ideas." In these cases, what else is there to really look at besides what someone is saying, and whether there's proof to back it up or discount it?

And on the topic of interest rates, Buffett sounded, to us anyway, what seemed like the biggest alarm of anything he said on Saturday...

We haven't seen these comments we're about to share from Buffett in the major headlines yet. They came toward the end of the meeting, so maybe other people had checked out for the night.

But they got our attention, especially given the work Stansberry Research editors and analysts have done over the years...

'It's probably the most interesting question I've ever seen in economics,' Buffett said...

A shareholder had just asked Buffett about interest rates, specifically negative interest rates in Europe and Japan... and their influence on certain Berkshire holdings. Here's what he said in response...

If you're going to have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you'd think the world would have discovered it in the first couple thousand years rather than just coming on it now. But we will see.

Can you keep doing what we're doing now? The world's been able to do it for now a dozen years or so, but we may be facing a period where we're testing that hypothesis with a lot more force than we've tested before... I wish I knew the answer.

Stateside, as we know, the Federal Reserve has "gone to zero." If not up, there's only "status quo" or "down" as options for the future.

And either way, negative "real" interest rates (subtracting inflation) are likely in the U.S. for the near future... again. It was also that way from 1974 to 1980 and after the 2008 financial crisis.

To that point, Buffett said there could be "extreme consequences" if the size and scope of current Fed policies last for a prolonged period of time...

I'd love to be Secretary of the Treasury if I knew I could keep raising money at negative interest rates. That makes life pretty simple.

We're doing things that we really don't know the ultimate outcome to. I think in general, they're the right thing, but I don't think they're without consequences, and I think they could be of extreme consequences if pushed far enough.

So what's the answer?

We can think of a few "extreme consequences" we've seen from this pandemic already...

More than 30 million new unemployed people in the past six weeks... And negative oil prices for a day...

These have been two almost "impossible" events, according to the probability modelers... And we've seen both within a few weeks.

So anyone who says today that he knows for sure exactly what will happen in the future is either a legitimate soothsayer... or is exaggerating quite a bit.

But smart, informed, and experienced investors can get pretty close to correct answers... and we have to make decisions at some point.

First off, if you're holding cash, that's not the worst thing in the world. And if you considered our general guidance for position sizing and asset allocation before stocks peaked in February, that's great advice, too.

Second, today, several of our editors are 'pounding the table' on one other Fed-fueled idea...

They believe all this "easy money" – rock-bottom interest rates paired with unprecedented stimulus measures and money-printing – will probably have some kind of serious consequences, just like Buffett said this weekend.

We can't say for sure exactly when this idea will come to fruition in its most obvious form. But if history is any indication, there's a good bet it will eventually...

That's because negative "real" interest rates are here... as the Fed has worked to devalue the U.S. dollar amid the coronavirus crisis and save the debt markets. (And the central bank might not be done yet, either.)

In short, this means the prices of so-called "hard assets" — ones that the Fed can't print — are likely to rise. One of those assets is gold...

Just check out what our colleague Dr. David "Doc" Eifrig and his research team recently shared with Retirement Trader subscribers, showing the correlation between negative "real" interest rates and gold prices...

They'll likely remain negative for the foreseeable future with the 10-year Treasury yielding just 0.6%.

Now take a look at what happens when we layer the price of gold on top of the chart of real interest rates. It's no coincidence that when real rates were negative back in 2011 and 2012, gold was hitting new highs...

One of the big knocks against holding gold and gold funds like [the SPDR Gold Shares (GLD)] is that it doesn't produce anything. There's no yield. It just sits there. But when there are negative real interest rates, savers would rather own gold.

Demand for gold should remain strong.

Before we go further, we want to make an important distinction between the 'price' and 'value' of gold...

Our Director of Research Austin Root makes it clear in our Stansberry Portfolio Solutions products...

While gold's price may fluctuate, the metal's value is "the closest thing we have to permanent in this world." As Austin writes...

Gold is a kind of financial scale. Its value doesn't change. The amount of gold in existence increases by less than 1% a year. People talk about trading gold – that's just nuts. Gold's value isn't going to budge. It's the other assets that are moving around gold...

That's the No. 1 reason you want to own gold during a crisis. Whether you're worried about inflation or a deflationary debt collapse... gold will remain unchanged in value.

Sure, the price of gold might change, but its value won't. Remember, price is a ratio, in this case comparing gold with dollars. So, when the price of gold changes, what's really happening is that the value of the dollar is changing.

This is exactly why, as we've said in the Digest over the past week, legendary gold investor John Doody is going "all in" on gold today.

He believes that what the Fed has done (and is doing) will spike the price of gold to a new all-time high of $3,000 per ounce or higher... May that be an "extreme consequence"?

Now, the Oracle of Omaha didn't specifically say "gold" at any point in his thoughts during Berkshire's annual meeting, at least not directly. He spoke instead about U.S. Treasurys and cash, which are also good bear market investments.

But funny enough, Buffett did indirectly talk about this idea, even if he didn't realize it. When he made an analogy about Berkshire's defensive positioning right now, he said...

Our position will be to stay a Fort Knox.

Unbelievable... the home of the largest gold reserves in the country. Why not just go for the real thing?

Now, before we wrap up, we want to reiterate one more critical note about gold...

Most gold stocks are terrible.

And just buying physical "gold" is not an investment... As Austin said, gold's inherent value won't change, but its value relative to all other assets in the world will.

That's why it's a great "chaos hedge."

But buying gold stocks, which is what John recommends, is investing. So when doing so, you must be careful... just as you would be with any other stock. That's why we cautioned in last Monday's Digest that investors shouldn't just go to Google and snap up the first gold stock that sounds appetizing.

But there's an opportunity here, too...

Buying gold stocks that are well-researched and personally vetted – the variety that John recommends – will likely yield more money on each ounce of gold when its price goes up.

My point is... you can't just know that gold is going to go "up." And if you're looking for a gold investment as something more than a pure portfolio stabilizer, you need to know exactly how to own the companies in the industry that are worthy of your money.

John has excelled in this space for the past 50 years... And he has developed a gold-stock-picking system that has crushed the returns of the benchmark S&P 500 Index over time.

So if that sounds like something you'd be interested in, we encourage you to click here now to learn more about the opportunities in gold today from John, his business partner Garrett Goggin, and Stansberry Research Publisher Brett Aitken.

Because while we're in "extreme consequences" territory, you might as well make some money from it... But don't wait – John's research won't be available at this special low price much longer.

New 52-week highs (as of 5/1/20): Alamos Gold (AGI), Calibre Mining (CXB.TO), Franco-Nevada (FNV), Lonza (LZAGY), Flutter Entertainment (PDYPY), and Wheaton Precious Metals (WPM).

In today's mailbag, feedback on Dan Ferris' Thursday Digest about "societal death." Do you have a comment or question? Send it to feedback@stansberryresearch.com.

"After reading your email, I decided to write about the farmers in our area. They have brainstormed a local plan. They are providing residents with fresh produce, eggs and honey. They are also partnering with a local butcher shop.

"I realize that this will not settle the big problem with the big farmers, slaughter houses and processors, but if they could sell to the 'mom and pop' butcher shops, it would help on a small scale. My other suggestion is to stock up on canned tuna and eggs for a source of protein.

"Thanks for your words of wisdom. P.S. I live in NJ, the 'Garden State'!" – Paid-up subscriber Tamara S.

"In the article, you discuss interconnectedness... In addition to the actions having to all happen to get an end result – each of the steps has some environmental impact in terms of an amount of energy consumption and solid/gaseous emissions. These are cumulative.

"A life cycle analysis tries to sum up all of these to give a picture of the environmental impact of a give product or service. When people arbitrarily choose to start their comments about their product at the use phase (i.e. wind/solar), they omit all of the upfront issues in manufacturing, transport, etc., when the full scope (including end disposition) are considered, sometimes the validity of the claims for products become suspect.

"Done properly, these are complex, time-consuming and fairly costly to do – and in the end they do not reduce well to a good or bad label so hard for the public to use. If however people want to insist on environmental sensitivity for investing, these are the kinds of things that really 'prove' whether the company is doing the right things." – Paid-up subscriber William H.

"Dan, I'm disappointed. You've started drinking Porter's Ayn Rand Kool-Aid. The writer of iPencil was facing a world where Stalinist bureaucrats were trying to present their centrally planned economy as an alternative to capitalism. We know where that led to...

"As I wrote Porter, you can't enjoy your liberty and pursuit of happiness if you've lost your life to an epidemic. The capitalist system is the greatest system for wealth creation, but there are cases of 'market failure.' Usually government ends up running the things no one else wants or is able to make a profit at. I much preferred your 'Ignore politics and buy great businesses at good prices.' Leave the other stuff to the screaming heads on the media." – Stansberry Alliance member D.V.

"I fully understand the interconnectedness of business, economy, life in general. I also agree that government is not the answer to every problem, especially in a divisive, antagonistic environment politically. However, I have less trust and belief that if people were free to make their own decisions in the face of a situation like the coronavirus.

"It is pretty clear to me, from history to the current, that people make poor decisions, mainly from a lack of understanding, and from the usual point of view that it cannot happen to me.

"The current shutdown was caused and extended by mass mistakes in judgment and information. A global issue such as COVID 19 set the world ablaze become people do not trust people, that greed and power rule many people's minds. China's historical secrecy hurt badly. The lack of sharing information was deadly. The lack of a better inter- and intra-agency information sharing, of an inherent distrust of those agencies by our leaders, allowed a situation to get out of control. The lockdown should not have had to last so long. Government is at fault, and government needs to act. There is no middle ground, there is no 'let people decide for themselves.'

"Lastly, people are not chattel. Lives are not economic units. The world's economy has changed numerous times over the course of history. Capitalism is the most recent, and most effective manner of an economy amassing wealth in the hands of a few. It is not a perfect system, though so far it is the best that has been developed. But that is a discussion for a different day." – Paid-up subscriber Michael P.

"I, too, am appalled at the rampant violation of fundamental rights. 'Oh, but this is unprecedented,' they say. Well, no it isn't. Here's a little perspective...

"In the early 1950s, it was a requirement to attend public school that you be immunized against smallpox. There were virtually NO immunizations for anything else. The Salk vaccine didn't come out until I was in the fourth grade. Yet we went to school and led normal lives.

"The Asian Flu in 1957 killed over 70,000 Americans, in an America with only about 54% of today's population. The Hong Kong Flu in 1968 killed about 100,000 Americans, in an America with about 2/3 of today's population. (BTW, in both cases, more than we lost in the Vietnam War.)

"Yet no one would have even dared to suggest that Americans be placed under house arrest, denied the right to attend religious services, or even denied the right to go out to a movie." – Paid-up Flex subscriber P.E.S.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 4, 2020