Warren Buffett once declared he'd leap off Omaha's tallest building if he weren't a millionaire by 30.
He was seven years old, and it was after reading a book called "One Thousand Ways to Make $1,000."
One idea in the book that caught Buffett's attention was the concept of compounding.
He put this phenomenon to work by investing in a scale where people would pay to weigh themselves. It was a mind-boggling idea in the 1940s.
Buffett said, "I thought — that's where the money is. The compounding of it — what could be better than that?"
The freakishly bright, then 14-year-old would later use this same compounding strategy to place pinball machines he owned in barber shops — splitting the revenue 50% with the barber and using his profits to buy more machines.
This is light years away from my school days when I was the locker candy king, holding the canteen hostage. It shows that Buffett was playing in a different league even back then.
Buffett says — "I'm just lucky to have been in the right place at the right time. Another place, another time, I wouldn't have been as successful. Society enabled me to make my money, and my money should go to society."
Buffett has a massive pile of cash, and top economists think he's bracing for a downturn because he doesn't see any good spots to invest his firm's money.
It's a signal that's becoming hard to ignore
All signs point in one direction.
During Berkshire Hathaway's annual meeting, Buffett said, "The incredible period of growth for the U.S. economy is ending."
In one of his last interviews before his death, Warren Buffett's lifelong business partner, Charlie Munger, said, "We should get used to making less."
Jamie Dimon, the head honcho of JP Morgan and one of the most significant U.S. bankers, says:
"It's the most dangerous time the world has seen in decades. We had so much fiscal and monetary stimulation. I'm a little more on the cautious side that we are facing a lot of things in པ or ཕ."
Asset prices move optically with money printing, and the markets are trying to front-run future liquidity events. It explains why the S&P500 has made a significant recovery.
Renowned British investor Jeremy Grantham, famous for studying market bubbles, believes there's a 70% chance we're heading for a recession that could result in a further 50% correction of the S&P 500.
The 84-year-old seasoned pro says:
"I think of myself as a realist trying to see the world as it is and not the way I'd like it to be. And sometimes, I succeed, and sometimes I fail in that".
The U.S. debt-to-GDP ratio is 124.6%, meaning America borrows more money than its economic productivity can absorb.
The government spent $6.6 trillion last fiscal year, with the total revenue at $4.44 trillion. It left a deficit of $1.70 trillion, an increase of $320 billion compared to the prior year.
With refinancing on the table and interest rates dropping during an election cycle, expect the money printers to kick into overdrive.
U.S. Debt to GDP: SourceOne signal to look out for.
I'm quickly learning that top investors are using the Manufacturing Index to anticipate future productivity and, in turn, corporate profits.
Buffett believes it's a more challenging world for businesses, and the data shows it.
Warren Buffett:
"I get a report of what businesses are doing, and in the retail business, they're down 22% in sales." He says, "Some are living off orders placed months ago."
Buffett's Berkshire Hathaway has a substantial market cap of $874.7 billion, and his sentiment might explain his impressive cash balance of $189 billion.
His cash pile is growing at 7% a year!
This time, he's waiting, anticipating the right opportunity. The money alone could buy McDonalds with spare change to play with.
Buffett: "Supply lines were so impacted (lockdowns) that no economic figures are pure, but I'm telling you my impression — I look at the numbers every day, I look at sales day by day."
He says they're down — and the ISM reflect the same indicators.
The ISM (Institute of Supply Management) surveys 50,000+ executives from 400 US manufacturing companies monthly to gauge their sentiment on various factors, such as employment, new orders, production, and more.
The survey helps predict economic trends.
The ISM index is the lead indicator for the U.S. and Global economy, with a 70-year track record of predicting every recession.
A score below 50 indicates contraction and may signal an impending recession above 50 signals growth, with over 60 showing a booming economy.
As of publishing, we are at 48.5 but have shown signs of recovery.
Macro Economic expert Raoul Pal says:
"What you don't want to do is look at where the ISM is today. The secret is the ISM goes up and down in a cycle — when it goes down, it usually goes all the way down into a recession, and when it goes up, it goes up to a boom — once you know that, you know how to invest, and I find the ISM the single most important indicator".
ISM Survey Score 48.5: SourceWho will be left when the dust settles? Aim to be that person.
As Buffett says, "Your investment thesis will be right because your data and reasoning are right."
W.B. is not in the business of making market forecasts — he's trying to deploy people's money in the best and safest way he knows how.
Warren Buffett — "We just want to be the last man standing, and if it means losing out on price appreciation by not using tools like leverage, then so be it."
The Oracle of Omaha has successfully navigated six U.S. recessions and dozens of stock market corrections. He says, "Nobody else can quite make a deal like we can under the right circumstances."
Patience continues to be his winning ingredient because when companies struggle or have borrowing issues, sitting on cash presents an opportunity.
Warren Buffet — Source
"Good companies may not want to sell but just need $20 billion.
There could be a situation where several very decent companies have a very uncomfortable borrowing structure, and money comes due to them at the wrong time — that's where companies pick up the phone.
We know the number of phone calls you can make at a time like that is very limited."
Final Thoughts
There is a lot of short-term focus on what could happen.
Buffett isn't playing fortune teller with a crystal ball — he's just smartly squatting on a mountain of cash. Listening to experts on both sides has me convinced — nobody really knows what's coming next.
Macroeconomic expert Raoul Pal, who I've also studied religiously, believes we've already seen the bottom of the stock market and the business cycle is set to turn as early as soon as now or Q4 2024.
Pal thinks it's unlikely we'll see further catastrophic failure because there are too many reasons for liquidity to return to the system, which stimulates asset prices.
Raoul Pal — Source
"If I'm right in what I've laid out, the economy is slow. We're in a recession. It'll recover next year, and we'll be in the sweet spot where the economy is recovering and earnings are coming back in 2024."
Chris Bloomstran manages $550 million in assets—his most significant position is Berkshire Hathaway. He says, "You should see Buffett's cash pile as a percentage against assets." When you do, it's pretty ordinary. He has 17.5% in cash compared to the average of 13% since 1996.
It's still well below its peak of 40% cash against assets in 2004.
But when the Wizard of Wall Street sits on cash, I take note.
It's a market signal worth watching.
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This article is for informational purposes only and should not be considered financial, tax, or legal advice. You should consult a financial professional before making any significant financial decisions.
