Despite sitting on a massive cash hoard, Warren Buffett has been on a selling spree. After completely divesting from airline stocks, his latest target is financial giant Goldman Sachs (NYSE:GS).
At this year’s Berkshire Hathaway meeting, Buffett told us banks weren’t his major concern. So why did he cut his Godman stake by 84%?
Buffett has been parting ways with a lot of old friends lately ., including Phillips 66 and beloved insurance giant Travelers Cos.
When you consider that his airline holdings have also gone, the sea-change at Buffett’s firm makes sense given the dire employment conditions in the United States brought about by the coronavirus pandemic.
What is surprising is Buffett’s decoupling from Goldman Sachs mere weeks after he told his annual shareholder meeting that banks weren’t the problem:
They had done some things they shouldn’t have done [in 2008], some of them, and they were certainly in far different financial condition than now. So the banking system is not the problem in this particular [situation. I think the banks have behaved very well and are in very good shape. … They’ve built up great reserves there and built own balance sheets.
If the financials aren’t the problem, yet Buffett takes almost all his chips off the table, something is going on behind the scenes.
The answer lies in the very same shareholder meeting, where Buffett said:
You can dream of scenarios that put a lot of strain on banks, and they’re not totally impossible. They’re going to have problems with energy loans, they’re going to have extra problems with consumer credit.
There’s no underestimating just how lousy energy loans have become.
It doesn’t take a lot of dreams to realize that the booming global economy might have encouraged some greater leveraging from the major banks. JPMorgan Chase (who Buffett also trimmed his stake in) said in 2016 it would boost reserves for lousy energy loans by $1.5 billion if crude stayed at $25 for more than 18 months .
Well, how does negative $40 a barrel sound? Even if JPMorgan and Goldman were cautious, the damage is unavoidable and already showing.
Let’s not even go into car company loans, commercial real estate, or anything to do with the tourism industry.
Next, let’s take a look at consumer credit. More than 36 million Americans are unemployed. Yes, there are more generous unemployment benefits, but by all accounts, a lot of states haven’t paid out yet.
Goldman Sachs has been making a push into retail banking , and that doesn’t have great prospects at the moment. The Federal Reserve recently warned that there could be a sharp rise in household debt defaults .
The talk of the town now is the possibility of negative interest rates, which can hurt banks deeply if their ability to make interest on their loans collapses.
While Jerome Powell and other members of the FOMC have pushed back strongly against the idea of cutting below zero, given the scale of the printing that has gone on so far, it’s not a stretch to see this happening.
You don’t need to be Warren Buffett to guess that a lot of the economic damage is going to fall squarely on Goldman Sachs and its peers. Where it does help to be a billionaire investor is you have a much better grasp on the extent of the damage.
Buffett didn’t exactly lie. The coronavirus and the associated lockdown is the problem, not the banks. Unfortunately, we all know who’s going to be left holding the bag after a decade of cheap money risk-taking, and so does Warren.
A hurricane of permanent layoffs and major bankruptcies is brewing, which means Wall Street bailouts will be needed. But there’s no money or public support left to make that happen.
Berkshire Hathaway exits stage left.