What Buffett is telling us?

Not sure how many people noticed the news that the value investment master, Warren Buffett, is seeking to increase his ownership for Bank of America to 10% of the company. I don’t see any major market reaction to this news but I think Buffett is sending an important note to us, which is likely related to what the FED is doing at the moment. If you still don’t know yet, the Fed is effectively doing another round of QE, although Powell denied publically to be doing so. Since the last Fed meeting in Jul, Fed has not only stopped shrinking its balance sheet, it has started to actively buy Treasury again every month, which is in essence of a QE with a slight but important twist. In the past few years of QEs, Fed was buying long term Treasury bonds. But this round, they are buying short term Treasury only. What they are doing is effectively artificially steepening the yield curve, which has inverted recently and triggered a great concern of a recession that may be coming. It may be a clever move by the Fed this time to manually depressing the short term yield by buying short term bonds so that to widen the yield curve. That’s really what we are seeing right now and the market seems quite happy with a reducing chance of an immediate recession. This kind of manipulation is quite beneficial to the banks as they typically borrow money with short term interests and lend out for higher interests for longer term. This is how they make money. As smart as Buffett is, he is certainly knowing this too well and he wants to take the full advantage of this new QE. That’s why he wants to boost his ownership for BoA, a smart move. So I think the banking sector should generally be a good place to put some money in the next year or two as long as the Fed is continuing this type of QE.     

 

There's one thing I'm not sure about is how long lasting the effect will be with this QE manipulation by the Fed. The whole world right now is just like a heroin addict. When he has got too much and used to a large dose, the symptom rebounding effect will be enormous when the dose is cut a bit. That’s what happened late last year after the Fed had shrunk its balance sheet for two years. The problem for addicts is, after a cut back for some time, even a resumption in the large doses may not be enough to quickly end those problems (symptoms). Usually they need more and more doses to curb their addictive symptoms. Unfortunately after more than a decade long of dumping of the cheap money (heroin) to the market that has become so addicted to it, our financial system has become more and more weak and feeble. It is still OK with some increasing amount of heroin dumped to it again. The question is how long the effect can truly last and what will be the ultimate consequence from it! I don't think it will be pretty at all and probably very ugly when the final reckoning day comes. Of course this is a topic we will talk a lot more in the future as by no means it is anything imminent. But the longer the can is kicked down the road, the worse the consequence will be. Enjoy what you can get for now but it will be really wise to be also prudently prepared for the worst to come. It is not if, but just when the final reckoning day will come. The Fed's new QE has probably pushed it further down the road by 1-2 more years but heroin addiction will pay the price eventually regardless what is done!