Warren Buffett warns of a ‘red hot’ economy and rising inflation

Berkshire Hathaway ended the first quarter with a near-record $145.4bn of cash on hand as it continued to generate funds faster than its CEO could deploy them

Berkshire Hathaway chairman Warren Buffett walks through the exhibit hall as shareholders gather to hear from the billionaire investor at the company's annual shareholder meeting in Omaha, Nebraska. ReutersShow less

Warren Buffett delivered a clear verdict Saturday on the state of the US economy as it emerges from the pandemic: red hot.

“It’s almost a buying frenzy,” the Berkshire Hathaway chief executive said during the conglomerate’s annual meeting, which was held virtually from Los Angeles. “People have money in their pocket and they’re paying higher prices,” he said.

Mr Buffett attributed the faster-than-expected recovery to swift and decisive rescue measures by the Federal Reserve and US government, which helped kick 85 per cent of the economy into “super high gear,” he said. But as growth roars back and interest rates remain low, many – including Berkshire – are raising prices and there is more inflation “than people would have anticipated six months ago,” he said.

Mr Buffett reunited with his long-time friend and business partner Charlie Munger for this year’s meeting. Mr Munger didn’t make it to last year’s meeting in Omaha, Nebraska – Buffett’s hometown – due to the shutdowns across the country. Some shareholders were relieved to see the duo fielding questions together again.

“I really feel that both Charlie and Warren displayed their usual and amazing level of acuity and intellectual energy,” said James Armstrong, who manages assets including Berkshire shares as president of Henry H. Armstrong Associates.

Mr Buffett and Mr Munger spent hours fielding questions, from the economy, to climate and diversity, the SPAC boom, taxes and succession.

Berkshire faced pressure from two shareholders proposals, one to improve transparency related to its efforts on climate change. The topic was bound to be a feature at the meeting – and it was.

When asked about the proposals, Mr Buffett stuck to his previous stance. Measures to produce big reports on diversity and climate for his business lines spanning energy to railroads were, he said, “asinine.” The proposals were later voted down.

Berkshire Hathaway chairman Warren Buffett and vice chairman Charlie Munger speak at the virtual annual meeting, held in Los Angeles. Reuters

Mr Buffett was also asked about Berkshire’s stake in oil and gas producer Chevron, which it disclosed earlier this year. Mr Buffett said he felt “no compunction” in the least about its ownership in the company, which he said had benefited society in many ways. While he acknowledged the world is shifting away from hydrocarbons, people on the extreme sides of either argument are “a little nuts,” he said.

Greg Abel, chairman of Berkshire Hathaway Energy, called climate change a “material risk.” He added that they’re setting targets and spending $18 billion over 10 years on transmission infrastructure.

Mr Buffett warned investors that Berkshire might not have much luck striking deals amid the boom in special purpose acquisition companies that gripped the market over the past year.

“It’s a killer,” Mr Buffett said about the influence of SPAC companies on Berkshire’s ability to find businesses to buy. “That won’t go on forever, but it’s where the money is now, and Wall Street goes where the money is.”

Mr Buffett, 90, also spent part of Berkshire’s annual meeting Saturday addressing the recent boom in retail and day trading. A lot of people have entered the stock market “casino” over the past year, he said.

Mr Buffett said President Joe Biden’s proposals for a corporate tax hike would hurt Berkshire shareholders. He added that antitrust laws and tax policy could change things for the company but new tax laws wouldn’t alter its no-dividend policy.

Buffett and Munger, 97, fielded the majority of questions at Saturday’s meeting, but their two top deputies Mr Abel and Ajit Jain, who runs the insurers, also shared the stage. Investors were able to get a closer look at the pair who are considered the top candidates for the job.

Mr Munger dropped a little mention of the post-Buffett years that drew speculation on social media about the most likely candidate to succeed Mr Buffett. The chief executive was pointing out that decentralisation doesn’t work everywhere because it requires a certain type of culture that businesses need to have.

“Yeah, but we do,” Mr Munger insisted. “And Greg will keep the culture.”

Mr Abel has long been considered the top candidate to replace Mr Buffett, especially when he was promoted to a vice chairman role overseeing all non-insurance operations, which gives him a wide array of responsibilities, including oversight of the railroad BNSF and the energy business.

Mr Buffett offered a few mea culpas during Saturday’s meeting. He noted that selling some Apple stock last year was a mistake and even said that Haven, the health care venture with JPMorgan Chase and Amazon, thought it could fight the “tape worm” of American health care costs but the worm won.

“That was probably a mistake,” Mr Buffett said of those Apple stock sales last year. Berkshire still owned a roughly $110 billion stake in the iPhone maker at the end of March. “In fact, Charlie, in his usual low-key way, let me know that you thought it was a mistake too,” he said to Mr Munger, who shared the stage with him.

Before the annual meeting started, the company released its first quarter earnings, giving investors a dive into the 19.5 per cent operating profit gain during the period.

Berkshire ended the quarter with a near-record $145.4bn of cash on hand as it continued to generate funds faster than Mr Buffett could deploy them. But Mr Buffett also ended pulling back on some capital deployment levers during the period. He bought back just $6.6bn of Berkshire’s own stock, short of the record $9bn set in prior quarters, and ended up with the second-highest level of net stock sales in the first quarter in almost five years.