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By on May 4, 2020

The Buffett Indicator: Warren Buffett, ‘The Oracle of Omaha’

Berkshire Hathaway Inc. held its 2020 annual meeting of shareholders as a livestream-only event originating from Omaha, on May 2. The COVID-19 environment, mixed with the social distancing rules limited the presentations to that of Chairman and CEO Warren Buffett and Vice Chairman Greg Abel. 

The day before, Berkshire reported its Q1 results, which even though its operating earnings rose 5.68%, to $5.87 billion, its Q1 investment gains were minus-$54.51 billion, which translated to a net earnings loss of minus-$49.7 billion. The culprit of the loss is a generally accepted accounting principles (GAAP) rule, imposed in 2018, that requires a company holding equity securities to include in earnings the net change in unrealized gains and losses of those securities. This GAAP rule is disconnected from the operational reality of the business for any period. Additionally, it creates undue pressure on both companies and investors, for whom this GAAP rule is meaningless.

In order to put things in perspective, Berkshire has $124.7 billion in cash and Treasury bills.

As always, Mr. Buffett offered some wise words for all of us to consider: 

  • Never Bet Against America: in connection to CODIV-19, he said that it might take years to assess the full permanent impact of the pandemic and the effect on people’s outlook. Mr. Buffet stated, “We have faced tougher problems,” and “the American miracle, the American magic has always prevailed and it will do so again. “In the end, the answer is: Never bet against America,” he added.
  • Fed Chairman Jerome Powell Belongs ‘On a Pedestal,’ Mr. Buffett stated. “I always had Paul Volcker on a pedestal in terms of Fed chairmen,” he also said, adding that “Jay Powell, in my view, belongs with him on that pedestal…. They acted with unprecedented speed and determination” to sustain the economy.
  • Berkshire Eliminates all Airlines Stock from its Holdings: First-quarter disclosure shows Berkshire sold $6.5 billion of airline stocks from its portfolio in April, based on Mr. Buffett’s decision that he “had made a mistake” in making significant investments in four large U.S.-based airlines.”

The Buffett Indicator Revisited

The “Buffett Indicator,” is a metric used to measure the overall health and valuation of U.S. stocks that is a simple calculation of the total market capitalization of all U.S. stocks by the most recent gross domestic product (GDP). 

As of May 3, 2020, the Total Market Index is at $28.5 billion, which is about 132.3% of the last reported GDP.

The Buffett Indicator is telling us most stocks have not been as high or near their highs as right now. So further market deterioration may indeed be approaching. 

Week in markets: Record April; Whimpering May

The month of April was one for the record books, and the S&P 500 Index recorded its best month since 1987. However, May began with a whimper, even as the mixture of worldwide stimulus packages, with a stable dose of an apparent retraction in the new coronavirus cases, and the overall improved sentiment. We must note that all the economic data reviewed, including first-quarter U.S. GDP, Initial Jobless Claims, which reached 30.3 million, are weakening and worsening. Also the Institute for Supply Management (ISM) Manufacturing Index fell to 41.5, the lowest level since the Great Recession.

The current trend points to the start of the recession, and the question is how long. We have not realized the full force of the worsening economic activity because most lockdown measures were increased at the beginning of April, well into the second quarter. 

On to the markets, the Dow Jones Industrial Average closed the week on May 1at 23,723.69 for a loss of 51.58 points, or 0.22%, and a year-to-date (YTD) return of minus-16.9%. The S&P 500 closed at 2,830.71 for a loss of 6.03, or 0.21%, and a YTD return of minus-12.4%. The Nasdaq closed at 8,604.95 for a loss of 29.57, or 0.34%,  and YTD return of minus-4.1%. 

The Birling Puerto Rico Stock Index closed at 1,345.56, for a gain of 54.14, or 4.19%, and YTD return of minus-33.97%. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.64%, a change of  6.67%, and YTD return of minus-1.3%. The U.S. Treasury’s 2-year note closed at 0.2%, a change of minus-9.09%, and a YTD return of minus-1.7 percent.

The Final Word: The Magic Square

The magic square is a grid filled with distinct positive integers such that each cell contains a different integer, and the sum of the integers in each row, column and diagonal is equal. The mathematical study of magic squares typically deals with its construction, classification and enumeration. If you are still unsure what I mean, below you will find an example of a magic square that, when adding its numbers, totals 34. 

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As we analyze the current situation in Puerto Rico, we note that the most celebrated governors have been those who served during great times of crisis. You must be wondering, what does this have to do with the magic square. Well, everything. 

You see, the power and influence a governor has, in no small degree, is invisible to our eyes. It has to do with the distinct personality of each governor, and for that, there is no single measurement. 

Any governor who understands the magic square is one who will never leave decisions to chance, will follow up regularly, will realize that agency heads often lie to the governor to be sure they only hear what they want to hear. It takes organizational skills, savviness, determination and, to some degree, micromanaging, if you wish to accomplish something as governor. 

When former Gov. Rafael Hernández-Colón (RIP) retired to Ponce, he would come to see me often, as I was his banker. We would discuss many issues. One of those issues was management. I asked him how any one person can manage the government of Puerto Rico effectively? After a pause, he replied: “Always have a parallel process in government to allow for those that will not deliver or those who are not telling the truth and follow up to a point that seems like persecution. Only then will you get most of your job done.” 

One thing that is quite particular in most governors is the fact that all the power, symbols and actions are synthesized by one single reaction: the ability to convey a message. 

Gov. Wanda Vázquez Gared, with her inaction, constant change of position and accountability issues is causing significant harm to Puerto Ricans, especially those who have lost their jobs and now have nothing.  In the end, unlike the magic square, where numbers add up, being governor is all about character, honesty, confidence, clarity and compassion—qualities we can conclude are essential but invisible to our eyes.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

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